JVi. 


UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


"2-  C? 


^ 


CASES  ON 
LAW  OF   ASSOCIATION 


By 

George  Wharton  Pepper,  LL.  D. 


and 


William  Draper  Lewis,  Ph.-D. 

Professor  of  Law  in  the  Law  School  of  the   Unioersily  of  Pennsylvania 


[Compiled  in  tlie  Biddle  Memorial  Law  Library  of  the  University. of  Pennsylvania.] 


PHILADELPHIA: 

INTERNATIONAL    PRLNTING    CO, 
I915 


T 


COPYRIGHT   1910 

BY 

Gf.ori.e  Wharton  Pepper 

AND 

VVii.i.iAM  Draper  Lewis 


CHAPTER   I. 


THE   AGENT'S   POWER   TO   SUBJECT    HIS 
PRINCIPAL   TO   LIABILITY. 


SECTION    I.— LIABILITY    ON     CONTRACT    AND 
FOR  POSITIVE   MISFEASANCE. 


HERN  z'.  NICHOLS. 
At  Nisi  Prius,  before  Holt,  Chief  Justice. 

I  Salkcld's  Reports,  289. 

In  an  action  on  the  case  for  a  deceit,  the  plaintiff  set 

forth,  that  he  bought  several  parcels  of  silk  for  silk, 

whereas  it  was  another  kind  of  silk;  and  that  the  defendant, 

well  knowing  this  deceit,  sold  it  him   for  silk.      On 

trial,  upon  not  guilty,  it  appeared  that  there  was  no  actual 
deceit  in  the  defendant  who  was  the  merchant,  but  that  it 
was  in  his  factor  beyond  sea:  And  the  doubt  was.  If  this 
deceit  could  charge  the  merchant?  And  Holt,  C.  J.,  was 
of  opinion,  that  the  merchant  was  answerable  for  the  deceit 
of  his  factor,  though  not  criminalitcr,  yet  civiliter;  for  see- 
ing somebody  must  be  a  loser  by  this  deceit,  it  is  more  reason 
that  he  that  employs  and  puts  a  trust  and  confidence  in  the 
deceiver  should  be  a  loser,  than  a  stranger.  And  upon  this 
opinion  the  plaintiff  had  a  verdict. 


2    AGENT'S  POWER  TO  SUBJECT  PRLNXIPAL  TO  LIABILITY 


BOULTON  r.  ARLSDEN. 
At  Nisi  Prius,  before  Holt,  Chief  Justice,  1697. 

3  Salk eld's  Report,  234. 

In  this  case  it  was  held,  that  where  a  scrz'aiif  usually 
buys  for  his  master  upon  tick,  and  takes  up  things  in  his 
master's  name,  but  for  his  own  use,  that  the  master  is  liable, 
but  it  is  not  so  where  the  master  usually  gave  him  ready 
money,  ^ 


WILTSHIRE  z'.  SIMS. 
At  Nisi  Prius,  before  Lord  Ellenborough.   1808. 

I  Campbell's  Reports,  258. 

Action  for  not  transferring  stock. 

The  only  witness  was  W'atkins,  the  broker  in  this 
transaction,  who  stated  that  the  defendant  gave  him  orders 
to  sell  out  £500  of  the  stock  of  the  trustees  of  the  Commer- 
cial Road ;  that  on  the  27th  of  August  he  agreed  to  sell  it  to 
the  plaintiff;  that  as  the  transfer  could  not  be  made  till  the 
expiration  of  a  fortnight,  when  there  was  to  be  a  meeting 
of  the  trustees,  the  plaintiff  paid  him  for  the  stock  by  a 
promissory  note  at  fourteen  days ;  that  in  taking  the  note 
he  acted  with  a  view  to  his  employer's  advantage,  thinking 
the  stock  might  fall  before  the  transfer  could  be  made ;  that 
he  paid  in  the  note  to  his  bankers,  where  it  was  attached  for 
a  debt  of  his  own;  and  that  at  the  end  of  the  fortnight  the 
defendant  refused  to  make  the  transfer,  as  he  had  received 
no  part  of  the  purchase  money. 


*  The  other  declarations  of  principles  of  law  are  omitted.  For 
another  report  of  the  case  purporting  to  give  the  facts,  see  i  Lord 
Raymond's  Reports,  224. 


WILTSHIRE  V.  SIMS  3 

It  was  contended  for  the  plaintiff,  that  the  sale  of  the 
stock  on  the  27th  of  August  was  binding  on  the  defendant. 
Watkins  was  his  authorized  agent,  and  had  acted  bona  fide 
for  his  benefit.  He  must  be  supposed  to  have  empowered 
his  agent  to  sell  the  stock  in  the  manner  most  for  his  interest, 
and  the  loss  ought  to  fall  upon  him,  not  upon  the  plaintiff, 
who  had  paid  for  the  stock,  under  the  natural  impression 
that  Watkins  had  authority  to  sell  it  immediately,  though  a 
short  time  was  to  intervene  before  the  stock  could  be  trans- 
ferred in  the  books    ^  the  trustees. 

Lord  Ellen  .ough  :  When  the  defendant  employed 
the  broker  to  seii  .le  stock,  he  employed  him  to  sell  it  in  the 
usual  manner.  He  made  him  his  agent  for  common  pur- 
poses in  a  transaction  of  this  sort.  But  did  any  one  ever 
Lear  of  stock  being  absolutely  exchanged  for  a  bill  at  four- 
teen days?  Has  a  broker  in  common  cases  power  to  give 
credit  for  the  price  of  the  stock  which  he  agrees  to  sell? 
The  broker  here  sold  the  stock  in  an  unusual  manner ;  and 
unless  he  was  expressly  authorized  to  do  so,  his  principal  is 
not  bound  by  his  acts. 

Plaintiff  non-suited. 


4    AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 


PECK  z:  HARRIOTT. 
In  the  Supreme  Court  of  Pennsylvania,  1820. 

6  Sergeant  and  Rawle's  Reports,  146. 

Duncan,  J.,  delivered  the  opinion  of  the  court. ^ 
The  plaintiffs  in  error,  being  the  owners  of  certain 
lands  in  the  counties  of  Erie,  Crawford,  Warren  and  Ve- 
nango, on  the  17th  October,  181 5,  constituted  one  Seth 
Young,  their  attorney,  in  their  names  to  contract  for  sale, 
sell  and  convey,  any  parts  or  parcels  of  the  lands,  ratifying 
and  confirming  all  that  their  said  attorney  might  lawfully 
do  in  the  premises.  On  the  29th  December,  in  the  same 
year,  Young  contracted  to  sell  to  the  defendants  two  parcels 
of  the  lands.  The  vendees  covenanted  to  pay  the  purchase 
money  in  four  annual  instalments,  with  interest,  and  make 
settlements,  and  certain  specified  improvements  on  the  land. 
The  first  instalment  became  due  on  the  29th  December, 
181 6,  and  in  March  and  April,  181 7,  the  vendees  paid 
Young  three  hundred  and  seventy-six  dollars  fifty  cents. 
By  this  article  the  vendors  by  their  attorney,  covenanted,  on 
payment  of  the  whole,  or  a  satisfactory  part  of  the  money 
and  interest,  within  the  specified  time,  the  improvements 
being  completed,  that  they,  or  their  representative,  would 
execute  a  conveyance,  a  good  and  sufficient  warrantee  deed 
in  fee,  provided,  such  party  should,  on  giving  the  said  deed, 
give  bond  and  mortgage  on  the  said  premises  for  the  con- 
sideration money,  or  so  much  thereof  as  should  be  due. 

This  action  was  brought  for  the  whole  consideration 
money,  and  the  question  submitted  to  the  Court  below  was 
on  the  validity  of  the  payments.  The  Court  adjudged  they 
were  valid,  and  on  this  opinion  we  are  now  called  on  to 
decide. 


^  The  statement  of  facts  as  given  by  the  Reporter  is  omitted. 


PECK  V.   HARRIOTT  5 

Every  general  grant  implies  the  grant  of  all  things 
necessary  to  the  enjoyment  of  the  thing  granted,  without 
which  it  could  not  be  enjoyed.  Every  general  power  neces- 
sarily implies  the  grant  of  every  matter  necessary  to  its 
complete  execution.  An  attorney  who  has  power  ^o  con- 
vey, has  so  essentially  the  power  to  receive  the  purchase 
money,  that  a  voluntary  conveyance,  without  receiving  the 
stipulated  price  or  security  for  it,  would  be  fraudulent,  and 
either  the  whole  contract  might  be  rescinded  by  the  prin- 
cipal or  the  vendee  liable  for  the  purchase  money.  The 
principal  authority  includes  all  mediate  powers  which  are 
necessary  to  carry  it  into  effect.  The  payment  of  the  pur- 
chase money  was  an  intermediate  act  between  the  articles 
and  the  conveyance.  The  receipt  of  the  purchase  money  is 
within  the  general  scope  of  an  authority  to  sell  and  convey, 
as  a  mediate  power,  as  an  act  without  which  the  conveyance 
would  be  fraudulent.  No  words  could  confer  a  more  ample 
authority  than  is  conferred  by  this  instrument.  He  has 
power  to  contract  for  sale,  and  having  so  contracted,  to 
convey.  All  the  acts  he  performs,  necessary  in  the  premises, 
are  ratified  and  confirmed. 

I  cannot  yield  to  the  argument,  that  having  contracted 
for  sale,  his  power  ended,  because  the  language  of  the  power 
is  very  explicit,  that  he  has  not  only  power  to  enter  into 
executory  contracts,  but  that,  having  entered  into  them,  he 
has  power  to  execute  them  by  conveyances,  and  we  must  not 
stop  at  the  words  contract  for  sale,  and  say,  that  is  a 
distinct  power,  but  must  go  on  with  the  whole  sentence, 
sell  and  convey.  Articles  are  the  first  step  usual  in  the  sale 
of  lands;  the  conveyance,  the  last  act  which  the  attorney  is 
authorized  to  perform.  If  he  had  conveyed  on  the  receipt 
of  the  whole  purchase  money,  it  is  admitted  that  this  would 
have  bound  the  principal.  If  he  had  power  to  receive  the 
whole,  he  had  power  to  receive  any  part,  and  it  surely  lies 
not  in  the  mouth  of  the  principal  to  say,  that  because  he  has 
not  conveyed,  he  has  no  right  to  receive  the  money ;  for  the 


6    AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

same  objections  would  arise  had  he  received  the  whole 
money  and  refused  to  convey.  The  validity  of  the  pay- 
ment does  not  rest  on  the  actual  conveyance,  but  the  power 
to  convey ;  the  payment  is  to  precede  the  conveyance.  There 
is  notliing  in  the  nature  of  the  thing,  to  justify  such  a  con- 
struction, nor  in  the  words  of  the  instrument,  and  it  is  a 
proposition  which  never  can  be  maintained,  that  he  had  only 
power  to  receive  the  money  when  he  had  conveyed,  and  that 
it  is  the  conveyance  which  renders  the  payment  valid; 
whereas,  the  conveyance  could  only  be  good,  if  the  money 
were  paid,  if  he  had  power  to  receive  the  money,  and  convey. 
If  he  has  received  the  money  and  not  conveyed,  the  pay- 
ment must,  in  all  reason  and  justice,  be  binding  on  the 
principal. 

That  the  attorney  here  did  not  exceed  his  authority  in 
making  the  contract  is  admitted  by  this  action  calling  for 
its  execution.  If  he  did  not  exceed  his  authority  in  making 
the  contract,  he  had  power  to  carry  it  into  execution  by 
conveyance.  In  order  to  enable  him  to  do  this,  payment  of 
the  money,  or  security,  was  so  necessary  an  incident,  that 
without  it  the  act  would  be  fraudulent.  He  had  power  to 
convey ;  to  convey  without  payment,  would  have  been  a 
fraud  on  the  principal ;  to  receive  the  purchase  money,  could 
not  be  a  fraud. 

It  is  not  pretended,  that  the  power  was  revoked;  much 
less,  that  notice  of  the  revocation  before  payment,  was  given. 
It  is  not  made  any  part  of  the  case,  that  there  was  any  fraud 
on  the  part  of  the  defendants. 

The  power  of  attorney,  is  unrestrained  as  to  time, 
credit,  or  condition.  All  the  authority  that  the  principals 
could  confer,  they  did.  They  substituted  Young,  with  all  their 
powers,  to  part  with  their  title ;  to  convey  the  estate  in  fee ; 
to  bind  them  with  covenants  of  general  warranty.  He  could 
sell  on  credit,  having  the  power  to  sell  on  credit;  he  could 
receive  the  money  from  the  vendee,  unless  there  was  some- 
thing in  the  instrument  restrictive  of  this.     It  would  be 


PECK  V.  HARRIOTT  7 

rather  an  unusual  mode  of  conducting  business,  to  empower 
an  attorney  to  sell  and  convey,  and  restrain  him  from  re- 
ceiving tlie  purchase  money.  Here,  he  is  not  so  restricted, 
and  the  implication  would  be  a  constrained  one;  it  would  be 
dangerous  for  the  Court  to  look  for  a  hidden  meaning, 
where  the  terms  are  neither  obscure,  nor  equivocal,  or  to 
imply  a  restriction  of  a  power  granted  in  general  terms. 
The  power  is  not  required  to  be  executed  uuo  flatii;  there  are 
several  acts  to  be  done,  at  several  times ;  the  last  act,  the 
conveyance,  not  to  be  immeditely  executed,  not  to  be  exe- 
cuted until  all  the  conditions  were  complied  with  by  the 
vendees.  The  several  payments  were  to  come  around ;  and 
until  paid,  or  a  satisfactorj'  part,  and  mortgage  given  for 
the  balance,  under  the  general  power  to  contract  for  sale, 
and  to  convey,  unrestrained  as  to  the  extent  of  authority, 
unlimited  in  its  duration,  remaining  in  full  force  at  the 
time  of  payment,  the  Court  of  Common  Pleas  decided 
rightly,  in  determining  these  payments  to  be  valid ;  and  the 
judgment  is  affirmed. 
Judgment  affirmed. - 


-Compare:  Penfold  v.  Warner,  96  Mich.  179,  1893.  (A  was  the 
owner  of  land  X.  A  and  his  wife  B  joined  in  a  power  of  attorney 
authorizing  C  to  sell  any  and  all  real  estate  belonging  to  them.  A 
quit  claimed  X  to  B.  A  died.  C  sold  and  conveyed  X  to  D.  B  sold 
and  conveyed  X  to  E.  D  brought  ejectment  against  E.  Judgment 
in  favor  of  E,  affirmed  on  the  ground  that  such  powers  of  attorney 
should  be  strictly  construed,  and  that  the  power  in  question  only 
covered  B's  dower  interest  in  X  at  the  time  of  the  execution  of  the 
power. ) 

Payne  v.  Potter,  9  Iowa,  549,  1859.  (B  authorized  C  to  sell  his, 
B's,  horse.  C  purported  to  sell  the  horse  to  A,  A  giving  his  note  there- 
for. A  took  possession  of  the  horse,  and  B  brought  an  action  of 
replevin.  At  the  trial  the  Court  charged  the  jury  "That  an  authority 
to  sellthe  horse  did  not  confer  upon  the  agent  authority  to  sell  him 
upon  time,  and  if  the  defendant  in  justification  shows  simply  an  author- 
ity to  sell,  he  must  in  addition  show  that  the  sale  was  for  cash."  Judg- 
ment for  plaintiff.     On  appeal  held,  that  the  charge  was  correct.) 


8    AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 


NORTH  RIVER  BANK  v.  AYMAR. 
In  the  Supreme  Court  of  New  York,  1842. 

3  Hill's  Reports,  262. 

Error  to  the  Superior  Court  of  the  city  of  New  York. 
The  action  in  the  court  below  was  by  the  North  River  Bank 
against  Aymar  and  Embury,  executors,  &c.,  of  Pexcel 
Fowler,  deceased,  on  eleven  promissory  notes,  six  of  which 
purported  to  have  been  made  on  behalf  of  the  defendants' 
testator,  and  were  signd  thus :  "Pexcel  Fowler — Jacob  D. 
Fowler,  att'y."  Of  these  six  notes,  four  were  payable  to 
the  order  of  David  Rogers  &  Son,  and  by  them  endorsed ; 
and  the  other  two  were  payable  to  the  order  of  Jacob  D. 
Fowler,  and  were  endorsed  by  him,  and  by  D.  Rogers  & 
Son.  The  remaining  five  notes  purported  to  have  been  made 
by  Jacob  D.  Fowler,  payable  to  the  order  of  Pexcel  Fowler, 
and  were  endorsed  in  the  same  form  in  which  the  other  six 
notes  were  signed — viz. :  "Pexcel  Fowler — Jacob  D.  Fow- 
ler, att'y" — and  were  also  endorsed  by  D.  Rogers  &  Son. 
The  case,  as  it  further  appeared  on  the  trial,  was  this :  The 
defendants'  testator,  in  his  lifetime,  executed  to  Jacob  D. 
Fowler  a  letter  of  attorney  in  these  words :  "Know  all  men, 
&c.,  that  I,  Pexcel  Fowler,  of,  &c..  have  made,  &c.,  Jacob  D. 
Fowler,  of,  &c.,  my  true  and  lawful  attorney,  for  me  and  in 
my  name,  place  and  stead,  and  to  my  use,  to  ask,  demand, 
&c.,  all  such  sum  and  sums  of  money,  debts,  &c.,  which  are 
or  shall  be  due,  owing,  &c.,  to  me,  Sic.  I  do  further  authorize 
and  empower  the  said  Jacob  D.  Fowler  to  draw  all  checks 
or  draffs  upon  any  of  the  banks  in  the  city  of  A-czv  York 
for  all  moneys  deposited  in  my  name,  to  endorse  any  promis- 
sory note  or  notes,  bills  of  e.rcluDige  or  drafts,  to  accept  all 
bills  of  exchange  or  drafts,  or  in  my  name  to  draw  any  note 
or  notes,  to  enter  merchandise  at  the  custom  house,  &c.,  and 
to  manage  and  negotiate  any  business  from  time  to  time  in 


NORTH  RIVER  BANK  v.  AYMAR  9 

the  same  manner  as  if  I  was  personally  present.  Giving 
and  granting  unto  my  said  attorney  full  power  and  authority 
in  and  about  the  premises,  &c.  In  witness,"  &c.  About  the 
time  this  power  was  executed,  Pexcel  Fowler  and  Jacob  D. 
Fowler  called  together  at  the  banking  house  of  the  plaintiffs 
and  left  it  in  their  possession,  where  it  had  ever  since  re- 
mained. The  notes  in  question  were  all  made  during  the 
life  of  the  defendants'  testator,  and  after  the  execution  of 
the  power.  Nine  of  them  were  not  made  or  endorsed  in  the 
business  of  the  defendants'  testator,  nor  for  his  use  or 
benefit,  but  for  the  accommodation  of  David  Rogers  &  Son, 
under  an  agreement  between  them  and  the  firm  of  Fowler, 
Gordon  &  Co.  (of  which  Jacob  D.  Fowler  was  a  member) 
for  the  mutual  exchange  of  accommodation  paper.  Fowler, 
Gordon  &  Co.  failed  in  business,  leaving  unpaid  a  large 
number  of  notes  made  and  endorsed  under  this  agreement, 
on  which  D.  Rogers  &  Son  were  liable,  and  which  had  been 
discounted  by  the  plaintiffs.  The  notes  in  question  were 
procured  by  D.  Rogers  &  Son  for  the  purpose  of  relieving 
themselves  from  such  liability,  and  were  passed  by  them  to 
the  plaintiffs  in  exchange  for  the  said  notes  of  Fowler,  Gor- 
don &  Co.  At  the  time  the  notes  in  question  were  received 
by  the  plaintiffs,  Samuel  D.  Rogers,  a  member  of  the  firm  of 
D.  Rogers  &  Son,  and  who  was  also  one  of  the  directors  of 
the  bank,  declared  the  notes  to  be  business  paper,  given  for 
goods  sold.  The  defendants  admitted  that  the  plaintiff's 
were  entitled  to  recover  on  two  of  the  eleven  notes ;  and,  in 
respect  to  the  others,  the  Court  charged  the  jury  that  Jacob 
D.  Fowler  exceeded  his  authority — that  the  power  being 
special,  the  plaintiffs  were  affected  by  the  excess,  and  were 
not  therefore  entitled  to  recover.  The  plaintiffs  excepted. 
The  jury  rendered  a  verdict  for  the  amount  of  the  two  notes 
in  favor  of  the  plaintiffs,  who,  after  judgment,  sued  out  a 
writ  of  error.  Some  other  facts  necessary  to  a  more  full 
understanding  of  the  case  will  he  found  stated  in  the  follow- 
ing opinions. 


10  AGENT'S  POWER  TO  SUBJECT  PRIXXIPAL  TO  LIABILITY 

CowEN,  J. :  As  the  notes  in  question  were  received  by 
the  plaintiffs  in  exchange  for  the  notes  of  Fowler,  Gordon 
&  Co.,  the  former  are  entitled,  so  far  as  their  rights  are  in 
question  on  this  writ  of  error,  to  be  considered  bona  fide 
holders  in  the  fair  course  of  trade  and  for  a  valuable  con- 
sideration. 

That  the  power  conferred  by  the  letter  of  attorney  was 
limited  to  notes  in  the  proper  business  of  the  testator,  and 
that  it  would  have  been  so  independently  of  the  words  to  his 
use,  there  can  be  no  doubt.  {St airier  v.  Tysen,  post,  p.  279; 
Nichol  V.  Green,  Peck's  Rep.  283 ;  Butcher  v.  Tysen,  U.  S. 
Circ.  Court,  Nov.,  1840,  4  Hunt's  Merch.  Mag.  456.)  To 
fulfil  this  purpose  of  the  power,  it  was  essential  that  the 
making  and  endorsing  should  be  upon  a  consideration  pass- 
ing to  Pexcel  Fowler,  the  testator.  There  is  nothing  in  the 
nature  or  effect  of  such  a  power  which  authorizes  the  attor- 
ney to  use  it  for  his  own  benefit  or  the  benefit  of  any  one 
excepting  the  principal.  And  if  this  limitation  be  such  that 
an  appointee  would  be  bound  to  notice  the  fact  that  the  attor- 
ney overstepped  it,  then  these  plaintiffs  were  properly  cut 
off  b}^  the  Court  below  from  their  claim  upon  the  contested 
notes  and  endorsements. 

The  general  rule,  that  when  an  attorney  does  any  act 
beyond  the  scope  of  his  power,  it  is  void  even  as  between 
the  appointee  and  the  principal,  has  always  prevailed,  and  is 
indeed  elementary  in  the  doctrine  of  powers.  The  ground 
on  which  the  rule  rests  is  familiar.  The  appointee  need  not 
deal  with  the  attorney  unless  he  choose;  and  it  is  very  rea- 
sonable that  he  should  be  bound  to  inspect  the  power,  when 
in  writing,  or  to  learn  its  language  in  the  best  way  he  can, 
when  it  is  by  parol.  On  becoming  acquainted  with  it,  he 
shall  be  holden  to  understand  its  legal  effect,  and  must  see, 
at  his  peril,  that  the  attorney  does  not  transgress  the  pre- 
scribed boundary  in  acting  under  it.  I  say  in  acting  under  it ; 
for  it  is  easy  to  compare  the  act  with  the  words  to  which  it 
must  conform ;  and  so  far,  there  is  nothing  unreasonable — 


NORTH  RIVER  BANK  v.  AYAIAR  11 

nothing  impossible  or  even  difficult.  In  speaking  of  the 
attorney's  acts,  I  certainly  mean  to  include  his  declarations 
made  at  the  time,  or  in  the  business  which  he  transacts  under 
the  power;  for  his  declarations  are  a  part  of  the  res  gestae, 
and  bind  his  principal  equally  with  the  act  to  whii:h  they 
relate.  They  are  always  received  as  evidence  against  the 
principal.  I  authorize  a  man  to  borrow  a  sum  of  money  for 
me.  The  power  being  limited,  he  has  no  authority  to  borrow 
for  himself  or  his  neighbor.  He  goes  to  the  lender  and 
borrows  in  my  name,  showing  him  my  written  power,  and 
declaring  at  the  same  time  that  he  takes  the  loan  on  my 
account.  Both  his  acts  and  declarations  are  evidence  against 
me. 

A  question  often  arises  upon  this  and  the  like  cases,  how 
far  the  appointee  is  responsible  for  the  agent's  ndelity.  Take 
it,  in  the  instance  supposed,  that  his  acts  and  professions 
make  out  a  case  within  the  terms  of  his  authority ;  is  the  man 
who  advances  his  money  accountable  for  the  truth  or  the 
good  faith  of  a  transaction  winch,  so  far  as  he  can  see  and 
has  reason  to  believe  at  the  time,  is  in  honest  conformity 
with  such  authority  ?  Take  it  that  the  attorney  comes  with  a 
falsehood,  meaning  the  loan  for  his  own  use,  or  the  use  of 
another  whom  he  desires  to  accommodate ;  must  the  ap- 
pointee lose  his  money  ?  He  brings  his  action  against  the 
principal,  and  proves  the  letter  of  attorney  and  the  loan  as 
stated ;  is  it  necessary  to  do  more  ?  or  can  the  principal  turn 
round  upon  him  and  show  that  his  attorney  was  false  to  his 
interest,  and  so  infer  that  the  man  who  trusted  to  his  letter 
and  made  a  loan  apparently  according  to  its  purview,  must 
himself  be  visited  with  the  consequences  of  the  fraud?  I 
confess  that,  until  I  heard  the  argument  in  this  cause,  I  had 
supposed  the  mere  statement  of  such  a  case  furnished  its 
own  answer;  and  that  to  allow  such  a  defence,  would  be 
pushing  the  duty  of  enquiry  on  the  part  of  the  appointee  far 
beyond  the  principle  on  which  it  is  founded — indeed,  to  an 
extent  absolutely  impracticable. 


12  AGENT'S  POWER  TO  SUBJECT  PRINXIPAL  TO  LIABILITY 

The  case  I  have  instanced  is,  in  principle,  the  one  now 
before  us.  The  plaintiffs  were  apprised  that  Jacob  D.  Fow- 
ler had  power  to  make  and  endorse  notes  in  the  business  of 
the  testator;  and  notes  actually  made  and  endorsed  by  the 
attorney,  and  purporting  to  have  been  so  made  and  endorsed 
in  conformity  with  the  power,  were  presented  to  and,  in 
effect,  discounted  by  the  plaintiffs.  This  act  was  equivalent 
to  an  express  declaration  that  the  notes  were  made  and 
endorsed  in  the  business  of  the  testator.  A  man  gives  a 
power  to  sell  land,  and  the  attorney  executes  a  deed  in  the 
name  of  the  principal.  The  transaction  imports  the  same 
thing  as  a  recital  or  express  declaration  referring  to  the 
power ;  and  the  principal  is  equally  estopped  to  deny  that  the 
authority  has  been  pursued. 

There  are  a  few  general  principles  entirely  settled  and 
universally  acted  upon,  especially  in  dealing  with  negotiable 
paper,  which  it  may  be  well  to  remember.  One  was  laid 
down  in  Hem  v.  N^ichoh  (i  Salk.  289).  The  defendant's 
factor  being  authorized  to  sell  silk,  defrauded  the  vendee ; 
and  Holt,  Ch.  J.,  held,  that  the  principal  was  liable  for  the 
deceit;  "for,"  said  he,  "seeing  somebody  must  be.  a  loser  by 
this  deceit,  it  is  more  reason  that  he  that  employs  and  puts  a 
trust  and  confidence  in  the  deceiver,  should  be  a  loser,  than  a 
stranger."  (Sec  also  Bozvlcs  v.  Stczvart,  i  Sch.  &  Lef.  222; 
The  Monte  AUegre,  9  Wheat.  644.)  An  application  of  this 
principle  to  men  who  had  authorized  an  agent  to  endorse  for 
them  was  made  in  Putnam  v.  Sullivan  (4  Mass.  Rep.  45), 
a  case  coming  very  near  if  not  quite  up  to  the  one  before  us. 
The  defendants,  who  were  merchants,  having  occasion  to  be 
absent,  left  their  names  with  a  clerk  on  blank  paper,  to  be 
filled  up  by  him  and  advanced  on  the  sale  of  goods  by  the 
house  upon  commission,  or  to  renew  the  notes  of  the  house 
when  due  at  the  banks.  On  some  he  was  authorized  to  bind 
them  as  makers,  and  on  others  as  endorsers.  A  man  ob- 
tained one  of  the  latter  from  the  clerk  by  false  pretences, 
wrote  and  signed  a  note  on  the  other  side,  and  got  money 


NORTH  RIVER  BANK  i:  AYMAR  13 

Upon  it  for  his  own  use  on  the  credit  of  th.e  endorsement,  the 
lenders  having  no  notice  of  the  fraud.  The  defendants  were 
held  liable.  The  plaintiffs  were  informed,  too,  that  it  was  a 
blank  endorsement  which  had  been  left  with  the  clerk,  to  be 
used  in  the  business  of  the  defendant.  Parsons,  Ch.  JL,  said  : 
"Here  one  of  two  innocent  parties  must  suffer.  The  en- 
dorsees confided  in  the  signature  of  the  defendants;  and 
they  could  have  no  reason  to  suppose  that  it  had  been  im- 
properly obtained.  On  the  other  hand,  the  loss  has  been 
occasioned  by  the  misplaced  confidence  of  the  endorsers  iu  a 
clerk  too  young  or  inexperienced  to  guard  against  the  arts 
of  the  promisor."  Looking  at  the  fact  that  the  plaintiffs 
knew  the  clerk  was  limited  to  use  the  note  in  the  business  of 
his  principals,  the  power  was  the  same  in  respect  to  them, 
as  that  of  Jacob  D.  Fowler  here  in  respect  to  the  bank. 
They  found,  as  the  bank  did,  that  the  agent  had  delivered  out 
the  note  to  the  promisor,  but  not  that  he  had  exceeded  his 
power,  though  he  had  done  so  in  fact.  Why  not  require 
them  to  stop  and  ascertain  whether  it  had  been  delivered 
out  upon  a  consideration  passing  to  the  defendants?  The 
answer  is,  that  they  had  put  their  agent  in  a  condition  which 
enabled  him  to  impose  upon  strangers  by  apparently  pursuing 
his  authority.  They  had  given  him  a  discretion  to  speak  for 
them,  both  by  words  and  actions.  The  neglect  or  falsehood 
of  their  agent,  therefore,  was  legally  imputable  to  them. 
The  paper  being  issued  without  consideration,  whether  by 
their  agent  or  themselves,  was  indeed  void  as  between  the 
original  parties;  but  there  being  in  each  case  a  power  to  issue 
paper  valid  in  form,  it  could  not  be  impeached  in  the  hands 
of  a  bona  fide  holder.  Everybody  knows  that  a  partner  who 
issues  a  note  of  the  firm  for  his  own  benefit,  exceeds  his 
power;  but  the  firm  cannot  avail  themselves  of  the  objection 
as  against  a  bona  fide  holder.  Another  case  is  that  of  Prcs- 
cott  V.  Flynn  (reported  in  Chitty  on  Bills,  35,  note  Am.  ed. 
of  1839).  In  that  case  it  was  proved  by  circumstances  that 
the  clerk  of  the  defendants  was  authorized  to  endorse  for 


14  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

them  in  their  business.  Availing  himself  of  that  authority, 
he  endorsed  their  names  on  two  bills  of  exchange  which  he 
procured  to  be  discounted  for  his  own  benefit,  and  absconded 
with  the  money.  It  was  hardly  pretended  that  the  plaintiff 
was  bound,  though  he  knew  of  the  limitation,  to  enquire 
whether  in  truth  the  money  was  intended  for  the  principals. 
Indeed,  when  the  case  came  to  be  reported  in  9  Bing.  19, 
the  reporter  thought  the  fraud  to  be  so  entirely  immaterial 
that  he  did  not  even  mention  it.  According  to  both  reports, 
the  Court  took  it  for  granted  that  the  agent  acting  for  him- 
self, instead  of  his  principals,  could  make  no  difference  as 
between  them  and  the  plaintiff.  It  was  enough  that  he  had 
power  to  act  in  the  defendants'  business,  and  did  apparently 
so  act.  In  Nczi'Iand  v.  Oakley  (6  Yerg.  489).  an  attorney 
having  power  to  assign  notes  for  his  principal,  did  so ;  but 
embezzled  the  money  which  he  got.  That  he  thus  assigned 
for  his  own  benelit  was  held  not  to  affect  the  right  of  a 
person  to  whom  one  of  the  notes  came  in  the  course  of  trade. 
These  cases  respecting  the  limited  powers  of  agents  to 
make  endorsements  accord  with  the  proposition  concerning 
powers  in  general  as  it  was  submitted  to  us  by  the  counsel 
for  the  plaintiff  in  error,  viz. :  "Whenever  the  very  act  of 
the  agent  is  authorized  by  the  terms  of  the  power,  that  is, 
whenever  by  comparing  the  act  done  by  the  agent  with  the 
words  of  the  power,  the  act  is  in  itself  warranted  by  the 
terms  used,  such  act  is  binding  on  the  constituent  as  to  all 
persons  dealing  in  good  faith  with  the  agent.  Such  persons 
are  not  bound  to  enquire  into  facts  aliunde.  The  apparent 
authority  is  the  real  authority."  Such  a  rule  was  substan- 
tially laid  down  by  Lord  Ellenborough.  Ch.  J.,  in  Pickering 
V.  Btisk  (15  East,  38,  43).  He  says:  "I  cannot  subscribe  to 
the  doctrine  that  a  broker's  engagements  are  necessarily  and 
in  all  cases  limited  to  his  actual  authority,  the  reality  of 
zvhich  is  afterzvards  to  he  tried  by  the  fact.  It  is  clear  that 
he  may  bind  his  principal  within  the  limits  of  the  authority 
with  which  he  has  been  apparently  clothed  by  the  principal 


XORTH  RIVER  BANK  v.  AYMAR  15 

in  respect  to  the  subject  matter;  and  there  would  be  no 
safety  in  mercantile  transactions,  if  he  could  not."  (Aji- 
drcws  V.  Knecland,  6  Cowen,  354,  357,  358,  and  the  books 
there  cited ;  Rossifcr  v.  Rossitcr,  8  Wend.  498,  499,  and  the 
cases  there  cited. ) 

How  were  the  plaintiffs  in  the  case  before  us  to  ascer- 
tain whether  Jacob  D.  Fowler  had  acted  in  good  faith  to- 
wards his  principal?  On  their  agent  asking  one  of  the 
payees,  Samuel  D.  Rogers,  of  the  firm  of  David  Rogers  & 
Son,  he  answers  that  the  notes  were  business  paper,  given 
for  goods  sold ;  and  this  is  another  circumstance  tending  to 
perfect  the  parallel  with  Putnam  v.  Sullivan. 

The  only  adjudged  case  cited  on  the  argument  for  the 
defendants  in  error,  giving  color  to  the  idea  that  the  ap- 
pointee must  look  behind  the  power,  is  Atwood  v.  MioDiings 
(I  Mann.  &  Ryl.  66;  7  Barn.  &  Cress.  42,  S.  C).  The 
power  in  that  case  was  extremely  limited,  being  tied  up  to 
the  acceptance  of  bills  particularly  described  The  words 
were:  "For  me.  and  on  my  behalf,  to  pay  and  accept  such 
bill  or  bills,  &c.,  as  shall  be  drawn,  &c.,  on  me  by  my 
agents  or  correspondents,  as  occasion  shall  require."  The 
bill  there  in  question  was  drawn  by  Burleigh,  a  partner  of 
the  defendant,  for  the  benefit  of  the  joint  concern;  and,  as 
the  Court  held,  he  was  neither  a  correspondent  nor  agent 
within  the  meaning  of  the  power.  There  was  indeed  no  need 
of  giving  effect  to  the  bill  by  an  acceptance  under  the  power ; 
for  Burleigh  was  authorized  to  bind  the  defendant  as  his 
partner.  The  Court  held  that,  as  the  power  described  the 
persons  whose  names  must  appear  upon  the  bill,  the  authoritv 
was  overstepped  if  the  names  were  not  there.  In  other 
words,  a  power  to  accept  a  bill  drawn  by  an  agent  did  not 
extend  to  a  bill  drawn  by  one  who  was  not  an  agent.  Here 
the  power  contains  no  such  limitation.  Tlie  case  cited 
accords  with  one  of  the  most  familiar  rules  for  the  con- 
struction of  powers;  but  it  does  not  apply.  If  the  principal 
will  describe  the  particular  condition  on  which  a  bill  shall 


16  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

be  accepted,  however  idle,  even  to  the  writing  of  it  with  a 
steel  pen,  it  must  be  fulfilled.  There  it  was  to  be  drawn  by 
a  correspondent  or  agent;  and  not  being  so  drawn,  but  by- 
one  who  was  a  principal,  the  condition  failed.  The  ap- 
pointee was  admonished  to  see  at  his  peril  that  all  the  pre- 
scribed requisites  were  combined.  The  principal  would  not 
trust  the  attorney,  even  to  judge  of  the  parties.  There  was 
another  clause  in  the  power  which,  as  Bayley,  J.,  inclined 
to  think,  also  amounted  to  a  condition.  The  bills  were  to  be 
drawn  as  occasion  should  require.  It  was  not  necessary  to 
say  that  the  plaintiff  was  bound  on  this  clause  to  see  the 
occasion  did  require;  and  a  majority  of  the  judges  who 
spoke  to  the  cjuestion  (Holroyd  and  Littledale,  JJ.)  did  not 
say  so.  The  two  reporters  do  not  entirely  agree.  In  7 
Barn.  &  Cress.,  both  of  the  two  latter  judges  are  made  to 
discuss  the  question;  in  i  Mann.  &  Ryl.,  Littledale,  J.,  is 
represented  as  having  given  a  naked  assent  to  what  Holroyd, 
J.,  said ;  but  in  neither  does  it  appear  that  any  but  Bayley,  J., 
considered  the  actual  occasion  of  accepting  as  a  condition. 
The  report  of  his  argument  is  substantially  the  same  in  both, 
though  in  Barn.  &  Cress,  he  seems  to  have  thought  it  suffi- 
cient to  have  called  for  the  letter  of  advice.  Littledale,  J., 
in  Barn.  &  Cress.,  thought  the  words,  as  occasion  shall  re- 
quire, did  not  vary  the  question;  and  that  the  power  should 
be  read  without  them.  This  was  conceding  the  ground  taken 
by  counsel,  that  the  attorney  had  a  discretionary  power  to 
judge  of  the  occasion.  I  have  looked  into  some  authorita- 
tive books  on  agency  to  find  how  this  case  has  been  consid- 
ered by  learned  writers  who  had  studied  the  subject.  It  is 
introduced  into  the  late  edition  of  Paley  on  Agency  (p.  192) 
by  a  simple  statement  of  the  case,  with  the  opinion  of  Bayley, 
J. ;  or  rather,  as  illustrating  the  general  remark,  that  all 
written  powers  are  to  receive  a  strict  interpretation,  the 
authority  never  being  extended  beyond  that  which  is  given 
in  terms,  or  is  absolutely  necessary  for  carrying  the  author- 
ity into  effect.    Judge  Story  mentions  the  case  several  times 


NORTH  RIVER  BAXK  r.  AYMAR  17 

in  his  work  on  agency  (pp.  22,  65  to  67,  69),  but  evidently 
considers  it  as  holding  no  more  than  that  the  appointee  is 
bound  to  see  the  proper  parties  introduced.  He  is  evidently 
of  opinion,  with  Littledale,  J.,  that  the  words,  "as  occasion 
shall  require,"  were  no  more  than  what  the  nature  of  such 
a  power  would  imply  without  them,  viz.,  an  authorityin  the 
agent  to  govern  himself  according  to  the  emergencies  of 
business.  The  necessity  mentioned  by  Mr.  Justice  Bayley 
of  calling  for  the  letter  of  advice  was,  I  think,  virtually 
denied  by  what  Best,  Ch.  J.,  and  the  whole  Court  afterwards 
held  as  to  letters  of  instruction  in  Withington  v.  Herring 
(5  Bing.  492 ;  3  Moore  &  Payne,  30,  S.  C. ).  Such  letters  are 
often  confidential  between  the  parties,  and  contain  matters 
not  fit  to  be  divulged.  He  said,  all  that  was  necessary  for 
the  plaintiffs  to  enquire  for,  was  the  authority.  The  case  of 
Atwood  V.  Aliinnings  was  mentioned  by  Park,  J.,  and  he, 
like  Judge  Story,  understood  it,  not  as  imposing  the  duty  to 
enquire  into  the  state  of  the  principal's  affairs,  but  only  as  to 
the  character  of  the  drawers.  Indeed,  there  is  hardly  any 
rule  better  settled  or  of  more  universal  application,  than  that 
the  appointee  need  not  enquire  as  to  matters  in  their  own 
nature  private  or  confidential  between  the  agent  and  prin- 
cipal. It  may  be  doubted,  says  Air.  Justice  Story,  if  upon 
this  subject  there  is  any  solid  distinction  between  a  special 
authority  to  do  a  particular  act,  and  a  general  authority  to 
do  all  acts  in  a  particular  business.  Each  includes  the  usual 
and  appropriate  means  to  accomplish  the  end.  (Story  on 
Agency,  70.)  Is  it  among  those  means  that  the  appointee 
shall  lose  his  money,  because  the  attorney  happens  to  betray 
the  interests  of  his  principal  ?  Would  not  such  a  rule  rather 
be  a  means  to  make  the  power  utterly  unavailable?  No 
prudent  man  would  advance  his  money  under  such  a  respon- 
sibility. The  rule  supposes  a  degree  of  capacity  to  look 
into  the  affairs  and  even  the  private  intentions  of  others, 
which  no  human  being  possesses. 

In  the  case  at  bar,  the  principal  was  much  abroad,  an  1 


18  AGENT'S  POWER  TO  SUBJECT  PRLXCIPAL  TO  LIABILITY 

had  left  this  letter  of  attorney  with  the  bank  for  the  very- 
purpose  of  obtaining  credit  there.  It  had  been  repeatedly 
and  for  a  long  time  acted  upon,  the  testator  having  an  ac- 
count at  the  bank;  and  the  power  of  Jacob  D.  Fowler  never 
having  been  drawn  in  question.  This  very  case  admits  the 
validity  of  two  out  of  the  eleven  notes  in  question.  Such 
circumstances,  even  without  the  letter  of  attorney,  should 
bind  the  testator's  estate.  In  Prcscoft  v.  Flyiui,  the  defend- 
ants' clerk  having  been  introduced  as  confidential,  drawn 
bills,  and  on  one  occasion  only  been  empowered  to  endorse 
in  their  business,  they  were,  from  that  circumstance  alone, 
held  liable  on  his  subsequent  endorsement  of  their  names 
for  his  own  benefit.  Here  we  have  a  stronger  case.  Both 
the  testator  and  Jacob  D.  Fowler  came  with  the  letter  of 
attorney,  and  deposited  it  with  the  plaintiffs;  the  attorney 
had  drawn  and  endorsed  through  a  course  of  five  or  six 
years ;  the  testator,  a  ship  master,  being  frequently  at  home, 
and  knowing  and  approving  every  act  nearly  up  to  the  time 
of  the  making  and  endorsing  now  in  question. 

In  Nichol  v.  Green  (Peck's  Rep.  288),  the  attorney, 
under  a  power  like  the  present,  dealt  directly  with  the  plain- 
tiff', purchasing  on  his  own  account,  as  the  plaintiff"  knew ; 
and  then,  under  the  power,  made  and  endorsed  the  note  in 
question.  Haywood  and  Peck,  J  J.  held  what  we  have  just 
now  decided  in  Staiiier  v.  Tysen  (Post,  p.  279),  on  the  dis- 
tinction between  taking  the  note  with  or  without  knowledge 
of  the  fraud.  One  judge  dissented,  and  one  took  no  part  in 
the  cause.  It  does  not  appear  how  it  was  finally  decided. 
The  case  of  Butcher  v.  Tysoi,  which  was  before  the  Circuit 
Court  of  the  U.  S.,  in  November  term,  1840  (4  Hunt's 
Merch.  Mag.  456),  decides  the  same  point  the  same  way. 
The  plaintiff  cannot  complain  that  the  defendant  clothed  his 
agent  with  the  means  of  perpetrating  a  fraud  when  none 
has  been  actually  committed.  The  difference  rests  entirely 
upon  that  fact.  In  the  cases  cited,  the  question  in  debate 
was,  whether  by  authorizing  the  agent  to  issue  notes  in  the 
name  of  the  principal,  without  words  expressly  restricting 


NORTH  RIVER  BANK  v.  AYMAR  19 

the  issue  to  his  own  business,  he  did  not  confer  the  power 
of  issuing  them  for  the  benefit  of  everybody,  even  including 
the  attorney.  That  the  power  is  to  be  thus  construed,  was 
contended  in  the  case  before  us,  and  in  Staincr  v.  Tysen. 
We  have  arrived  at  the  conclusion  without  much  difficulty, 
that  to  give  the  power  so  great  an  effect,  the  principal  must 
go  farther,  and  expressly  declare  his  meaning  that  the  attor- 
ney ma}-  use  his  notes  for  the  benefit  of  others  beside  the 
principal. 

On  the  distinction  which  I  have  endeavored  to  estab- 
lish in  favor  of  a  bona  fide  holder,  I  am  of  opinion  that,  in 
the  case  at  bar,  the  Court  below  erred  when  they  charged 
that  the  attorney  had  exceeded  his  power  in  that  sense  whicli 
avoided  these  notes  in  the  hands  of  the  plaintiffs.  As 
against  his  principal,  he  did  exceed  his  power;  but  the  ex- 
ecutors must  look  to  him,  not  the  plaintiffs,  for  their  in- 
demnity. 

The  point  that  the  bank  had  notice  through  Samuel  D. 
Rogers,  the  director,  does  not  arise.  There  was  indeed  evi- 
dence that  he  had  notice  and  acted  as  director  in  respect  to 
nearly  if  not  quite  all  the  notes.  If  these  things  finally  turn 
out  to  be  so,  of  course  the  plaintiffs  cannot  recover  on  those 
notes  in  respect  to  which  they  were  thus  affected  with  notice. 
{Bank  of  the  United  States  v.  Davis,  2  Hill,  451.)  But 
the  question  was  entirely  excluded,  by  the  charge,  from  the 
consideration  of  the  jury;  and,  for  aught  we  can  see,  the 
Court  laid  no  stress  upon  it.  They  put  the  case  on  the  naked 
independent  question  of  authority;  and,  under  the  chargs 
given,  the  jury  were  bound  to  find  for  the  defendants, 
although  they  believed  the  plaintiffs  were  bona  fide  holders. 
I  have,  therefore,  as  in  duty  bound,  considered  them  sucli. 
No  doubt  they  were  so  in  fact.  If  not  so  constructively, 
owing  to  one  of  their  agents  having  had  notice,  they  must 
fail ;  but  they  are  none  the  less  entitled  to  have  the  question 
tried  and  disposed  of  upon  that  issue. 

Some  other  minor  points  were  mentioned  on  the  argu- 
ment by  the  counsel  for  the  defendants  in  error;  but  the 


20  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

same  answer  applies.  They  were  not  passed  upon  in  the 
Court  below.  On  the  whole,  I  am  of  opinion  that  the  judg- 
ment should  be  reversed;  a  z'cnirc  dc  novo  to  go  from  the 
Court  below,  the  costs  to  abide  the  event. ^ 


^  Bronson,  J.,  concurred.  The  dissenting  opinion  of  Nelson,  Ch. 
J.,  is  omitted,  the  reasoning  being  the  same  as  that  of  Chief  Justice 
Shaw  in  Mussey  v.  Beecher,  infra. 

Compare:  New  York  &  New  Haven  R.  R.  Co.  v.  Schuyler,  34 
N.  Y.  30,  1865.  (The  directors  of  the  C  Co.  appointed  their  president 
B  as  a"  stock  transfer  agent.  As  such  agent  B  was  authorized  to  note 
the  transfer  of  certificates  on  the  books  of  the  company,  to  issue  new 
certificates  on  the  surrender  of  old  certificates,  and  when  the  company 
sold  stock  to  issue  certificates  to  the  purchasers.  B,  for  his  own 
purposes,  transferred  into  his  own  name,  and  afterwards  sold  stock, 
which  had  no  existence  in  fact,  but  for  which  he  issued  certificates 
on  their  face  apparently  valid.  These  spurious  certificates  were  pur- 
chased by  A,  ct  al,  who  were  ignorant  of  B's  fraud.  As  between  A 
ct  al..  and  the  C  Co.  it  was  held  that  the  spurious  stock  was  not  stock 
of  the  company,  but  that  the  property  of  the  company  was  liable  for 
the  injurv  to  A  et  al..  on  the  ground  stated  by  Comstock,  J.,  in  Gris- 
wold  V.  Hernen,  25  N.  Y.  601,  namely:  "That  where  the  authority  of 
an  agent  depends  upon  some  fact  outside  the  terms  of  his  power,  and 
which,  from  its  nature,  rests  particularly  within  his  knowledge,  the 
principal  is  bound  by  the  representation  of  his  agent."  p.  68). 


GRANT  f.  NORWAY  21 


GRANT  z:  NORWAY. 

In  the  Court  of  Common  Pleas,  1851.- 

10  Common  Bench  Reports,  665. 

This  was  an  action  upon  the  case  by  the  endorsees  of 
a  bill  of  lading,  against  the  owners  of  a  vessel,  to  recover 
the  amount  of  advances  made  by  the  former  upon  the  bills 
of  lading,  the  goods  never  ha^•ing  in  fact  been  shipped.^ 

Jervis,  C.  J.,  now  delivered  the  judgment  of  the  Court. 

This  case  was  argued  before  my  brothers  Cresswell 
and  Williams,  and  myself.  It  arises  upon  a  special  verdict, 
and  presents  a  Cjuestion  of  considerable  importance,  both 
to  those  who  take  bills  of  lading  on  the  faith  of  their  rep- 
resenting property  which  passes  by  the  transfer  of  them,  and 
to  the  ship-owner,  whom  it  is  attempted  to  bind  by  all  bills 
of  lading  which  his  captain  may  think  fit  to  sign.  The  point 
presented  by  the  several  pleas  is  substantially  one  and  the 
same,  viz.,  whether  the  master  of  a  ship,  signing  a  bill  of 
lading  for  goods  which  have  never  been  shipped,  is  to  be 
considered  as  the  agent  of  the  owner  in  that  behalf,  so  as 
to  make  the  latter  responsible.  The  authority  of  the  master 
and  necessary  for  the  use  and  enjoyment  of  the  ship;  but  is 
of  a  ship  is  very  large,  and  extends  to  all  acts  that  are  usual 
subject  to  several  well-known  limitations.  He  may  make 
contracts  for  the  hire  of  the  ship,  but  cannot  vary  that  which 
the  owner  has  made.  He  may  take  up  money  in  foreign 
ports,  and,  under  certain  circumstances,  at  home,  for  nec- 
essary disbursements,  and  for  repairs,  and  bind  the  owners 
for  repayment;  but  his  authority  is  limited  by  the  necessity 
of  the  case,  and  he  cannot  make  them  responsible  for  money 
not  actually  necessary  for  those  purposes,  although  he  may 


^  The  rest  of  the  Reporter's  statement  of  facts,  and  his  notes  of  the 
arguments  of  counsel  are  omitted. 


22  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

pretend  that  it  is.  He  may  make  contracts  to  carry  goods 
on  freight,  but  cannot  bind  his  owners  by  a  contract  to  carry 
freigv.t  free.  So,  with  regard  to  goods  put  on  board,  he 
may  sign  a  bill  of  lading,  and  acknowledge  the  nature  and 
quality  and  condition  of  the  goods.  Constant  usage  shows 
that  masters  have  that  general  authority;  and,  if  a  more 
limited  one  is  given,  a  party  not  informed  of  it  is  not  af- 
fected by  such  limitation.  "The  master  is  a  general  agent 
to  perform  all  things  relating  to  the  usual  employment  of 
his  ship;  and  the  authority  of  such  an  agent  to  perform  all 
things  usual  in  the  li)ie  of  business  in  which  he  is  employed, 
cannot  be  limited  by  any  private  order  or  direction  not 
known  to  the  party  dealing  with  him." 

Is  it  then  usual,  in  the  management  of  a  ship  carrying 
goods  on  freight,  for  the  master  to  give  a  bill  of  lading  for 
goods  not  put  on  board?  for,  all  parties  concerned  have  a 
right  to  assume  that  an  agent  has  authority  to  do  all  which 
is  usual.  The  very  nature  of  a  bill  of  lading  shows  that  it 
ought  not  to  be  signed  until  goods  are  on  board ;  for,  it  be- 
gins by  describing  them  as  shipped.  It  was  not  contended 
that  such  a  course  is  usual.  In  Lickharrow  v.  Mason, 
Buller,  J.,  says:  "A  bill  of  lading  is  an  acknowledgment 
by  the  captain  of  having  received  the  goods  on  board  his 
ship;  therefore,  it  would  be  a  fraud  in  the  captain  to  sign 
such  a  bill  of  lading,  if  he  had  not  received  the  goods  on 
board;  and  the  consignee  would  be  entitled  to  his  action 
against  the  captain  for  the  fraud." 

It  is  not  contended  that  the  captain  had  any  real  au- 
thority to  sign  bills  of  lading,  unless  the  goods  had  been 
shipped :  nor  can  we  discover  any  ground  upon  which  a 
party  taking  a  bill  of  lading  by  endorsement,  would  be  jus- 
tified in  assuming  that  he  had  authority  to  sign  such  bills, 
whether  the  goods  were  on  board  or  not. 

If,  then,  from  the  usage  of  trade,  and  the  general 
practice  of  shipmasters,  it  is  generally  known  that  the  mas- 
ter derives  no  such  authority  from  his  position  as  master, 
the  case  mav  be  considered  as  if  the  party  taking  the  bill 


GRANT  z:  NORWAY  23 

of  lading  had  notice  of  an  express  limitation  of  the  author- 
ity;  and,  in  that  case,  undoubtedly,  he  could  not  claim  to 
bind  the  owner  by  a  bill  of  lading  signed,  when  the  goods 
therein  mentioned  were  never  shipped.  It  would  resemble 
the  case  of  goods  or  money  taken  up  by  the  master  under 
pretence  that  they  were  wanted  for  the  ship,  when  in  fact 
they  were  not;  or  a  bill  of  exchange  accepted  or  endorsed 
per  procuration,  when  no  such  agency  existed ;  Alexander  v. 
Macken::ie,  6  Com.  B.  766  (E.  C.  L.  R.,  vol.  60).  The 
words  "per  procuration"  give  notice  to  all  persons  that  the 
agent  is  acting  under  a  special  and  limited  authority;  and 
therefore  the  party  taking  such  a  bill  has  to  establish  the 
existence  of  the  authority ;  it  is  not  enough  to  show  that 
other  bills  similarly  accepted  or  endorsed  have  been  paid, 
although  such  evidence,  if  the  acceptance  were  general,  by 
an  agent  in  the  name  of  the  principal,  would  be  evidence  of 
a  general  authority  to  accept  in  the  name  of  the  principal. 
So,  here,  the  general  usage  gives  notice  to  all  people  that 
the  authority  of  the  captain  to  give  bills  of  lading,  is  lim- 
ited to  such  goods  as  have  been  put  on  board;  and  a  party 
taking  a  bill  of  lading,  either  originally,  or  by  endorsement, 
for  goods  which  have  never  been  put  on  board,  is  bound  to 
show  some  particular  authority  given  to  the  master  to  sign 
it. 

There  is  little  to  be  found  in  the  books  on  this  subject. 
It  was  discussed  in  Berkley  v.  Watting,  7  Ad.  &  E.  29  (E. 
C.  L.  R.,  vol.  34),  2  N.  &  P.  178.  That  case  was  decided 
on  another  point:  but  Littledale,  J.,  stated,  that,  in  his  opin- 
ion, a  bill  of  lading  is  not  conclusive  upon  the  ship  owner. 

For  these  reasons,  we  are  of  opinion  that  the  issues 
should  be  entered  for  the  defendants,  and  that  the  defend- 
ants are  entitled  to  judgment. 

Judgment  for  the  defendants. 


24  AGENT'S  POWER  TO  SUBJECT  PRLNXIPAL  TO  LIABILITY 


MUSSEY  V.  BEECHER. 
In  the  Supreme  Court  of  Massachusetts,  1849. 

57  Massacliitsctts  Reports,  511. 

Shaw,  C.  J.,  delivered  the  opinion  of  the  majority  of 
the  Court.  ^ 

This  is  an  action  of  assumpsit  for  goods  sold 
and  delivered,  which  are  alleged  to  have  been  purchased 
of  the  plaintiff  by  the  defendant,  through  the  agency  of  Wil- 
liam Pierce,  acting  under  a  power  of  attorney  from  the  de- 
fendant. The  question  is  upon  the  legal  construction  of  the 
defendant's  power  of  attorney  to  Pierce,  which  is  in  writing. 

"Know  all  men  by  these  presents,  that  I,  Laban  S. 
Beecher,  of  Roxbury,  in  the  county  of  Norfolk  (doing  busi- 
ness in  Boston),  leather  dealer,  do  hereby  constitute  and 
appoint  William  Pierce,  of  Andover,  in  the  county  of  Es- 
sex, bookseller,  my  sufficient  and  lawful  attorney,  for  me, 
in  my  behalf  and  as  my  agent,  to  purchase  books,  paper  and 
stationery,  for  the  purpose  of  carrying  on  business  in  said 
Andover ;  and  the  same  to  sell  again,  for  my  benefit  and  on 
my  account,  on  such  credit  and  at  such  prices  as  he  may 
deem  meet ;  to  collect,  recover,  demand  and  receive  all  debts 
and  sums  of  money  due  and  receivable  for  and  on  account 
of  the  sales  of  said  goods  and  merchandise,  and  generally 
to  do  and  perform  such  matters  and  things  as  are  neces- 
sary and  proper  for  the  carrying  on  and  conducting  of  said 
business. 

Provided,  however,  that  said  Pierce  shall  not  make 
purchases  or  incur  debts  exceeding  in  amount  at  any  one 
time  the  sum  of  two  thousand  dollars,  and  also  that  this 


*  Having  inserted  in  the  opinion  the  power  given  by  the  principal 
to  the  agent,  the  statement  of  facts  as  given  by  the  Reporter  is  omitted. 


MUSSEY  V.  BEECHER  25 

power  or  agency  shall  not  extend  for  a  period  of  time  more 
than  one  year  from  the  date  hereof,  or  beyond  the  ist  day 
of  January,  A.  D.  1842.  Hereby  ratifying  and  confirming 
whatsoever  my  said  attorney  may  do  in  the  premises.  In 
testimony  whereof,  I  have  hereunto  set  my  hand  aud  seal 
this  first  day  of  January,  in  the  year  eighteen  hundred  and 
forty-one. 

E.  N.  Badger,  wdtness.        Labax  S.  Beecher,  (seal.) 

Boston,  Jan.  i,  1842. 

The  power  was  afterwards  extended  by  a  memoran- 
dum to  the  1st  of  January,  1843. 

The  presumption  is,  that  the  plaintiff  knew  of  the 
terms  of  this  power  and  of  its  limitation,  before  he  sold 
goods  to  Pierce,  on  the  strength  of  it,  and  on  the  credit  of 
the  defendant;  and  indeed,  the  evidence  was,  that  he  had 
seen  the  instrument.  Various  cjuestions  of  fact  were  sub- 
mitted to  the  jury,  on  the  evidence,  as  to  the  extension  of 
the  power,  or  a  waiver  of  the  limitation,  and  the  like;  but 
the  real  question  arises  upon  the  correctness  of  the  instruc- 
tions, in  matter  of  law. 

The  Court  instructed  the  jury,  that  the  plaintilT  must 
show,  that  such  goods  were  sold  under  the  power  to  Pierce, 
as  his  agent,  and  not  upon  the  personal  credit  of  Pierce; 
and  that,  although  the  power  was  limited,  and  such  limita- 
tion was  known  to  the  plaintiff,  yet  that  the  defendant 
would  be  liable  fo^  Pierce's  purchases,  even  though  he  had 
already  exceeded  the  amount  authorized  by  the  power;  if 
they  were  satisfied,  from  the  evidence,  that,  at  the  time  of 
the  purchases.  Pierce  represented,  that  by  such  purchases 
he  would  not  exceed  his  limit. 

In  another  connection,  the  same  instruction,  in  effect, 
was  given,  with  a  slight  variance  of  form,  as  follows :  "that 
if  the  plaintiff  had  inquired  of  Pierce  about  the  agency, 
and  had  been  informed  by  him  that  it  was  not  full,  and  he 
had  no  reason  to  suspect  the  truth  of  Pierce's  declaration, 
and  if  the  plaintiff  then  sold  goods  to  Pierce,  as  agent,  as 


26  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

aforesaid,  the  defendant  would  be  liable   for  such  goods, 
even  though  the  agency  was  then  full." 

The  former  part  of  this  instruction,  that  it  must  ap- 
pear, that  the  goods  were  not  sold  on  the  personal  credit  of 
Pierce,  is  unquestionably  correct;  but,  in  regard  to  the  lat- 
ter part,  which  makes  the  defendant  responsible  for  the 
veracity  and  accuracy  of  Pierce,  a  majority  of  the  Court 
are  of  opinion,  that  it  was  not  correct  in  point  of  law. 

This  power  of  attorney,  which  is  in  the  nature  of  a 
letter  of  credit,  is  precise  and  limited  in  amount;  and, 
though  it  contains  some  expressions,  intimating  that  the 
attorney  is  the  general  agent  of  the  constituent,  to  purchase 
and  sell  goods,  yet  this  is  controlled  by  the  proviso  and  ex- 
press condition;  and,  taken  all  together,  as  every  written 
instrument  must  be,  it  is  an  authority  to  purchase  in  the 
name  and  on  the  credit  of  the  author  of  the  power,  to  the 
amount  of  $2,000,  and  no  more. 

The  precise  point  is  this,  whether,  if  Pierce,  through 
design  or  mistake,  represented  to  the  plaintiff,  that  wdien  he 
made  the  purchase  in  question,  he  had  not  purchased  on  the 
credit  of  his  principal  to  the  amount  of  $2,000,  when,  in 
truth,  his  purchases  exceeded  that  sum,  the  defendant  was 
bound  by  it.  It  is  unquestionably  true,  that  the  statements 
and  representations  of  an  agent,  in  transacting  the  business 
of  his  principal,  within  the  scope  of  his  authority,  are  as 
binding  on  his  principal,  as  any  other  acts  done  within  the 
scope  of  his  authority ;  they  are  res  gestae,  and  are  acts.  But 
an  agent  cannot  enlarge  his  authority  any  more  by  his  dec- 
larations, than  by  his  other  acts;  and  the  rule  is  clear,  that 
the  acts  of  an  agent,  not  within  the  scope  of  his  authority, 
do  not  bind  the  principal.  It  js  often  said,  indeed,  that  one 
is  bound  by  the  acts  of  a  general  agent,  though  done  against 
his  instructions.  This  is  because  the  acts  are  within  the 
scope  of  his  authority;  and  the  violation  of  his  instructions, 
in  the  execution  of  such  authority,  is  a  matter  solely  be- 
tween himself  and  his  principal,  which  cannot  affect  a 
stranger  dealing  with  him  without  express  notice. 


MUSSEY  z:  BEECHER  27 

The  argument  is,  that  the  defendant  ought  to  be  bound, 
because  Pierce  was  his  agent,  and  he,  by  his  letter  of  attor- 
ney, had  put  it  in  his  power  to  make  such  purchase.  This, 
it  appears  to  us,  assumes  the  very  point  to  be  proved.  The 
plaintiff  knew  that  he  was  limited  to  $2,000;  he  knew,,there- 
fore,  that  if  he  had  purchased  to  that  amount,  his  power, 
by  its  own  limitation,  was  at  an  end.  If  it  were  otherwise, 
a  power  to  purchase  to  the  amount  of  $2,000,  would  operate 
as  a  power  to  purchase  to  an  unlimited  amount.  But  it  is 
urged,  that,  upon  this  construction,  no  one  could  safely  deal 
with  the  agent.  This  objection,  we  think,  is  answered  by 
the  consideration,  that  no  one  is  bound  to  deal  with  the 
agent ;  whoever  does  so  is  admonished  of  the  extent  and 
limitation  of  the  agent's  authority,  and  must,  at  his  own 
peril,  ascertain  the  fact,  upon  which  alone  the  authority  to 
bind  the  constituent  depends.  Under  an  authority  so  pecu- 
liar and  limited,  it  is  not  to  be  presumed  that  one  would 
deal  with  the  agent,  who  had  not  full  confidence  in  his  hon- 
esty and  veracity,  and  in  the  accuracy  of  his  books  and  ac- 
counts. To  this  extent,  the  seller  of  the  goods  trusts  the 
agent,  and  if  he  is  deceived  by  him,  he  has  no  right  to  com- 
plain of  the  principal.  It  is  he  himself,  and  not  the  princi- 
pal, who  trusts  the  agent  beyond  the  expressed  limits  of  the 
power;  and,  therefore,  the  maxim,  that  where  one  of  two 
innocent  persons  must  suffer,  he  who  reposed  confidence 
in  the  wrong-doer  must  bear  the  loss,  operates  in  favor  of 
the  constituent,  and  not  in  favor  of  the  seller  of  the  goods. 
Parsons  v.  Armor,  3  Pet.  413;  Stainer  v.  Tyscn,  3  Hill, 
279;  Attzvood  V.  Miinnings,  7  Barn.  &  Cr.  278.  The  case 
of  Piitnani  v.  Sullivan,  4  Mass.  45,  was  decided  on  the 
ground,  that  the  defendants,  by  leaving  blank  indorsements 
with  their  clerk,  had  authorized  him  by  his  act  to  bind  them 
as  indorsers. 

On  the  whole,  a  majority  of  the  Court  are  of  opinion, 
that  the  verdict  must  be  set  aside,  and  a  new  trial  granted. 

Wilde,  J.  I  have  been  unable  to  agree  with  my  learned 
brethren  in  the  decision  of  the  question  raised  at  the  trial  of 


28  AGENT'S  POWER  TO  SUBJECT  PRLXCIPAL  TO  LIABILITY 

this  cause;  although  I  fully  admit  the  principles  on  which 
the  question  has  been  decided. 

In  my  judgment,  with  great  deference  to  the  opinion 
of  my  brethren,  these  principles  are  not  applicable  to  the 
present  case.  The  question,  as  it  seems  to  me,  turns  on  a 
well  established  principle  of  law,  which  I  am  not  aware  has 
ever  been  disputed. 

The  principle  is  this,  that  wherever  one  of  two  inno- 
cent persons  must  suffer  by  the  acts  of  a  third,  he  who  has 
enabled  such  third  person  to  occasion  the  loss  must  sustain 
it.  It  is  so  laid  down  by  Ashhurst,  J.,  in  Lickharrozv  v. 
Mason,  2  T.  R.  63,  70.  "The  rule,"  says  the  learned  judge, 
"is  founded  purely  on  principles  of  law,  and  not  on  the  cus- 
tom of  merchants."  The  same  rule  of  law  is  laid  down  by 
Holt,  C.  J.,  in  Hern  v.  Nichols,  i  Salk.  289,  a  case  very 
like  the  present.  That  was  an  action  on  the  case  for  a  de- 
ceit practiced  on  the  plaintiff',  by  the  defendant's  factor,  in 
the  sale  of  several  parcels  of  silk;  and  it  was  held  by  the 
learned  chief  justice,  that  the  defendant  was  answerable  for 
the  deceit  of  his  factor,  though  not  criininalitcr,  yet  cirili- 
tcr;  for  seeing  somebody  must  be  a  loser  by  this  deceit,  it 
is  more  reasonable  that  he  that  employs  and  puts  a  trust 
and  confidence  in  the  deceiver,  should  be  a  loser,  than  a 
stranger."  The  same  principle  is  laid  down  by  Parsons,  C. 
J.,  in  Putnam  v.  Sullivan,  4  Mass.  45,  54,  and  by  Cowen, 
J.,  in  North  River  Bank  v.  Ayniar,  3  Hill,  263. 

I  admit  that  the  plaintiff  was  bound  to  inquire  into  the 
agent's  authority,  and  whether  the  sales  to  him,  on  the  credit 
of  the  defendant,  would  not  exceed  the  amount  limited  in 
his  power  of  attorney.  But  of  whom  was  he  to  inquire? 
He  certainly  had  no  means  of  knowing;  and  if  he  might  not 
rely  on  the  representations  of  the  agent,  the  consequence 
would  be,  that  no  sale  could  safely  be  made  on  credit  under 
the  power.  But  the  power  was  given  to  be  used  for  the 
benefit  of  the  defendant,  and  if  given  in  such  a  form  as  to 
enable  the  agent  to  perpetrate  a  fraud,  by  obtaining  credit 


MUSSEY  V.  BEECHER  29 

by  false  representations,  and  credit  was  so  obtained,  and  a 
loss  occurred,  it  should  be  sustained  by  the  defendant,  and 
not  by  the  plaintiff,  who  dealt  with  the  agent  in  good  faith, 
without  knowing,  or  having  any  means  of  knowing,  that  he 
was  exceeding  his  authority. 

Verdict  set  aside  and  new  trial  granted. - 


'  Compare  in  accord  with  opinion  of  Shaw,  C.  J.,  Baines  v.  Ewing, 
4  H.  &  C,  511,  1866.  (At  Liverpool  there  is  an  Underwriters'  Associa- 
tion, and  when  a  person  desires  to  become  an  underwriter  he  author- 
izes a  broker  to  underwrite  for  him.  It  is  well  known  that  in  almost 
all  cases,  a  limit  is  put  on  the  amount  for  which  the  broker  can  sign 
his  principal's  name,  but  when  the  principal's  name  is  given  to  the 
association  that  limit  is  not  mentioned.  B  authorized  C,  a  broker,  to 
underwrite  for  him  "marine  risks  not  exceeding  £100  by  any  one 
vessel."  C  underwrote  a  policy  on  A's  ship,  in  B's  name,  for  ii5o.  The 
ship  was  lost.  A  sued  B  on  the  policy.  Plea,  that  B  did  not  subscribe 
to  the  policy.  A  verdict  was  obtained  for  £150,  leave  being  reserved 
to  enter  a  non-suit,  or  reduce  the  verdict  to  iioo  unless,  etc.  Rule 
absolute  for  a  non-suit.     Martin,  B.") 


30  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 


UDELL  V.  ATHERTON. 
In  the  Court  of  Exchequer,  1862. 

7  Hurlstone  and  Norman's  Reports,  171.' 

Wilde,  B.  I  am  of  opinion  that  the  rule  ought  to  be 
absolute  to  enter  the  verdict  for  the  plaintiff;  and  I  have 
the  authority  of  the  Lord  Chief  Baron  for  saying  that  he 
agrees  with  the  judgment. 

This  was  an  action  of  deceit.  The  cause  was  tried  be- 
fore my  brother  Martin,  who  will  state  the  facts  more  fully. 
But  the  short  result  of  them  was,  that  the  plaintiff  bought 
of  the  defendant's  agent  a  log  of  mahogany:  that  he  was 
induced  to  do  so  by  certain  statements  of  the  agent  which 
were  false  to  his  own  knowledge,  dishonest,  and  fraudu- 
lent. He  has  paid  the  defendants  the  price  so  obtained, 
which  is  twice  the  real  value  of  the  log,  and  he  brings  his 
action  accordingly. 

The  question  is  thus  raised,  whether  a  principal,  who 
has  had  the  benefit  of  a  contract  made  by  his  agent,  is  re- 
sponsible for  a  deliberate  fraud  committed  by  his  agent  in 
the  making  of  the  contract,  by  which  fraud  alone  the  con- 
tract was  obtained. 

I  say  "responsible"  generally,  because  I  am  not  aware 
that  if  this  action  of  deceit  does  not  lie  against  the  princi- 
pal any  other  form  of  action  will.  If  this  be  so,  the  conse- 
cjuences  appear  to  be  as  follows : 

The  man  who  has  reaped  the  benefit  of  a  fraud  com- 
mitted on  his  behalf  keeps  the  fruits  in  his  pocket;  the  man 
defrauded  in  the  contract  has  to  look  to  the  intermediate 
person,  and  not  him  zvith  whom  he  contracted.  If  the  agent 
is  a  man  of  no  means  this  remedy  would  be  fruitless.     If 


'  The  facts  as  given  by  the  Reporter,  and  the  opinion  of   Bram- 
well,  B.,  concurring  with  Martin,  B.,  are  omitted. 


UDELL  z'.  ATHERTON  31 

the  agent  is  able  to  pay  he  does  so  without  remedy  over, 
and  the  person  defrauded  is  reinstated  out  of  the  funds  of 
one  man,  while  the  fruits  of  the  fraud  are  retained  by  an- 
other. 

These  results  make  it  desirable  to  examine  closely  the 
principles  upon  which  such  a  decision  is  to  be  supported. 

It  is  said  that  a  man  who  is  himself  innocent  cannot  be 
sued  for  a  deceit  in  which  he  took  no  part,  and  this  whether 
the  deceit  was  by  his  agent  or  a  stranger.  To  this,  as  a 
general  proposition,  I  agree.  All  deceits  and  frauds  prac- 
ticed by  persons  who  stand  in  the  relation  of  agents,  general 
or  particular,  do  not  fall  upon  their  principals.  For,  unless 
the  fraud  itself  falls  within  the  actual  or  the  implied  au- 
thority of  the  agent,  it  is  not  necessarily  the  fraud  of  the 
principal. 

On  this  principle  it  was  that  the  Court  of  Common 
Pleas,  in  Grant  v.  Norzvay,  lo  C.  B.  665  (E.  C.  L.  R.,  vol. 
70),  held  a  shipowner  not  responsible  for  the  fraud  of  the 
captain  in  signing  bills  of  lading  without  any  goods  on 
board;  and  so,  in  the  case  of  Coleman  v.  Riches,  16  C.  B. 
104  (E.  C.  L.  R.,  vol.  81),  a  wharfinger  was  held  not  liable 
for  a  false  receipt,  which  his  agent  had  given,  represent- 
ing that  goods  had  been  received  at  the  wharf,  which  liad 
not  so  been  received.  In  neither  of  these  cases  did  the  prin- 
cipal authorize  or  in  any  way  adopt  or  obtain  the  benefit  of 
the  fraudulent  act.  But  does  this  principle  apply  to  fraud 
committed  in  the  making  of  contracts  which  the  principal 
has  adopted,  and  of  which  he  has  claimed  and  obtained  the 
benefit? 

The  contract  is  made  by  the  agent  for  the  principal, 
but  when  made,  if  authorized  or  adopted,  it  becomes  in  law 
the  contract  of  the  principal.  Can  the  principal  treat  the 
contract  as  his,  and  repudiate  the  fraud  upon  which  it  was 
built  as  the  agents?  In  the  making  of  the  actual  contract, 
when  the  agent  speaks  he  does  so  with  the  voice  of  the  prin- 
cipal, for  it  is  the  principal's  contract  he  is  making. 

In  the  representations  which  immediately  preceded  the 


Z2  AGExXT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

contract,  is  the  agent  speaking  only  for  himself?  If  so,  on 
what  principle  is  it  that  the  principal  could  not  sue  upon  a 
contract  in  itself  valid,  but  preceded  and  brought  about  by 
fraudulent  representations  of  the  agent?  And  yet  this  is 
the  plain  law. 

This  brings  me  to  another  difficulty.  For  it  would 
surely  be  an  anomalous  state  of  things,  that  the  innocent 
principal  could  not  recover  upon  his  contract  because  fraud- 
ulently obtained  by  his  agent,  but  that,  if  before  discovery 
the  contract  be  performed,  he  may  ever  after  keep  the  bene- 
fit of  it.  Can  the  buyer's  right,  upon  any  sound  principle, 
be  made  to  depend  on  the  extent  to  which  the  transaction 
has  been  completed?  If  the  fraud  had  been  discovered  be- 
fore the  log  was  cut,  could  not  the  buyer  have  rescinded  the 
contract?  If  so,  why  may  he  not  recover  now,  when  the 
state  of  things  is  unaltered  by  any  laches  or  default  of  his? 

A  distinction  has  indeed  been  made  in  equity  between 
contracts  performed  and  unperformed.  The  latter  are 
sometimes  set  aside  for  mistake  or  surprise,  while  the  for- 
mer are  not.  But  no  such  distinction  has  ever  been  made  in 
favor  of  fraud.  Fraud,  in  all  Courts  and  at  all  stages  of 
the  transaction,  has,  I  believe,  been  held  to  vitiate  all  to 
which  it  attaches. 

Next,  as  to  the  authorities. — There  is,  I  believe,  no 
case  in  which  the  principal's  immunity,  under  such  circum- 
stances, has  been  established.  The  only  dictum  in  favor  of 
it  is,  I  believe,  that  of  Lord  Campbell,  in  the  course  of  argu- 
ment in  Wilde  v.  Gibson,  i  H.  L.  605,  615.  It  may  be 
doubted  if  it  is  correctly  reported,  at  any  rate  it  is  to  be 
taken,  in  my  opinion,  in  reference  only  to  the  point  then 
under  argument. 

The  authorities  the  other  way  are  as  it  seems  to  me 
overwhelming.  Baron  Parke,  in  Moens  v.  Hcyivorth,  10  M. 
&  W.  157,  says: — "To  support  this  action  for  false  repre- 
sentation, it  is  necessary  "to  prove  that  by  words  or  acts  of 
the  defendants,  or  their  agents,  it  was  made  falsely,  and 
for  the  improper  purpose  of  inducing  the  other  party  to 


UDELL  r.  ATHERTOX  33 

purchase."  Again,  in  irilson  v.  Fuller,  3  Q.  B.  yy  (E.  C  L. 
R.,  vol.  43  ),  Tindal,  C.  J.,  in  delivering  the  considered  judg- 
ment of  the  full  Court  of  Exchequer  Chamber,  says : — 
"There  was  there  a  fraudulent  concealment  by  Wadeson 
(the  agent)  which  it  must  be  admitted  would  bind  Mrs. 
Wilson  if  proved."  And  here  Wadeson  was  only  agent  and 
Mrs.  Wilson  avowedly  innocent,  and  the  action  against  her, 
as  here,  for  deceit.  Again,  the  Chief  Justice,  says : — "As 
to  the  representation  made  by  Wadeson,  which  if  fraudu- 
lent it  may  he  admitted  would  hind  her,"  &c.  And  again, 
in  the  much  canvassed  case  of  Cornfoot  v.  Fozvke,  6  AI.  & 
W.  2>72)^  Baron  Parke,  who  certainly  w^as  not  disposed  to 
overstrain  the  rigid  rules  of  law  in  favor  of  any  general 
views  of  equity,  said: — "It  must  he  conceded  that  if  one 
employ  an  agent  to  make  a  contract,  and  that  agent,  though 
the  principal  be  perfectly  guiltless,  knowingly  commit  a 
fraud  in  making  it,  not  only  is  the  contract  void  hut  the 
principal  is  liable  to  an  action."  Lastly,  this  poi)it  z>.'as  de- 
cided in  Hern  v.  Nichols^  1  Salk.  289,  often  quoted,  and 
so  far  as  I  know  never  impeached. 

To  these  dicta  must  be  added  the  authority  of  the  Ex- 
chequer Chamber  in  a  still  later  case,  Omrod  v.  Huth,  14 
M.  &  W.  651.  It  was  an  action  for  deceit  for  fraudulently 
putting  forward  certain  parcels  of  cotton  as  fair  samples; 
and  the  defendants,  the  sellers,  were  there  charged,  as  here, 
with  making  the  fraudulent  representation.  At  the  trial  it 
appeared  that  the  sale  was  by  the  defendants'  brokers.  Colt- 
man,  J.,  who  tried  the  cause,  directed  the  jury,  "That  unless 
they  could  infer  that  the  defendants,  or  their  brokers,  were 
acquainted  with  the  fraud  that  had  been  practiced  in  the 
packing,  or  had  acted  in  the  transaction  against  good  faith 
or  with  a  fraudulent  purpose,  the  defendants  were  entitled 
to  the  verdict."  On  a  bill  of  exceptions  the  Exchequer 
Chamber  upheld  this  ruling,  saying: — "If,  indeed,  the  rep- 
resentation was  false  to  the  knozvledge  of  the  party  making 
it,  this  would  be  conclusive  evidence  of  fraud."  And  the 
"party  making  it"  in  that  case  was,  if  anybody,  the  agent. 


34  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

I  find  no  case  in  which  this  principle  has  been  seriously 
doubted.  I  find  no  text  writer  who  does  not  adopt  it.  It  is 
well  stated  in  Mr.  Story's  Principal  and  Agent  at  sect.  134: 
"For  where  the  acts  of  the  agent  will  bind  the  principal, 
there  his  representations,  declarations,  and  admissions  re- 
specting the  subject-matter  will  also  bind  him,  if  made  at 
the  same  time  and  constituting  a  part  of  the  res  gestae." 
And  again,  at  sect.  135,  he  says: — "If  the  agent  at  the  time 
of  the  contract  makes  any  representations,  declaration,  or 
admission,  touching"  the  matter  of  the  contract,  it  is  treated 
as  the  representation,  declaration,  or  admission  of  the  prin- 
cipal hiniself." 

The  defendant  has  adopted  the  sale  made  by  his  agent 
and  received  the  price.  He  has,  by  the  fraudulent  state- 
ments of  the  agent,  obtained  rather  more  than  tw"ice  what 
he  could  have  obtained  by  an  honest  sale.  It  is  not  the  case 
of  any  matter  collateral,  as  a  warranty  may  be.  It  is  not 
the  case  of  a  representation  made  out  of  and  beyond  the 
particular  business  then  transacting  by  the  agent  on  the 
principal's  behalf.  It  is  the  representations  made  in  the  very 
dealing  itself,  in  the  conversation  that  resulted  in  the  con- 
tract, that  are  in  question. 

The  defendant  claims  the  right  of  separating  the  con- 
tract from  that  which  induced  it,  of  holding  the  price  and 
ignoring  the  false  statements  which  largely  enhanced  it. 
In  my  opinion,  justice,  the  common  reason  of  mankind,  and 
every  sound  rule  of  law  are  opposed  to  his  doing  so.  W'hat- 
ever  his  previous  authority  to  the  agent,  whatever  his  own 
innocence,  he  must,  as  it  seems  to  me,  adopt  the  whole  con- 
tract, including  the  statements  and  representations  which  in- 
duced it,  or  repudiate  the  contract  altogether. 

There  are,  no  doubt,  man}-  frauds  committed  by  agents 
which  would  not  bind  their  principals.  But  I  hold  that  the 
statements  of  the  agent  which  are  involved  in  the  contract 
as  its  foundation  or  ijidiiceiuent  are  in  law  the  statements 
of  the  principal. 

To  this  most  equitable  and  reasonable  extent  the  iden- 


UDELL  z:  ATHERTON  35 

tity  of  the  principal  with  the  agent  has  I  conceive  been  long 
established  in  our  laws.  It  has  been  much  discussed  whether 
an  untrue  but  innocent  statement  by  an  agent,  when  coupled 
with  a  knowledge  in  the  principal,  would  support  an  action 
of  deceit  against  the  principal  or  bar  an  action  on  the  con- 
tract. Such  were  the  cases  of  Cornfoot  v.  Fozvkc  and 
Fuller  V.  JVilson. 

The  artificial  identification  of  the  agent  and  principal, 
by  bringing  the  words  of  the  one  side  by  side  with  the 
knowledge  of  the  other,  induced  the  apparent  logical  conse- 
quence of  fraud.  On  the  other  hand  the  real  innocence  of 
both  agent  and  principal  repelled  the  notion  of  a  construct- 
ive fraud  in  either.  A  discordance  of  views,  varying  with 
the  point  from  which  the  subject  was  looked  at,  was  to  be 
expected.  And  the  result  is  found  in  the  elaborate  reason- 
ing of  the  judgments  in  the  above  cases. 

But  what  bearing  have  they  upon  the  case  now  in  hand  ? 
- — a  remarkable  one.  The  point  now  in  dispute  was  tacitly 
conceded  by  every  one.  If  the  agent's  statements  were  not 
those  of  the  principal,  it  was  needless  to  inquire  whether 
they  were  fraudulent.  It  would  have  been  enough  to  estab- 
lish that  what  the  agent  had  said  he  had  said  without  au- 
thority, and  the  immunity  of  the  employer  would  have  been 
established — it  was  needless  to  inquire  whether  the  state- 
ment was  fraudulent.  According  to  the  defendant's  argu- 
ment in  the  present  case,  the  statements  by  the  house  agent 
in  Coiiifoot  V.  Fozckc,  not  being  authorized,  in  no  way  af- 
fected his  principal  whether  fraudulent  or  not;  and  yet  the 
whole  inquiry  was  confined  to  whether  they  were  fraudu- 
lent or  not — a  needless  investigation  if  they  did  not  bind  the 
principal  at  all. 

But  the  same  question  has  arisen  and  been  the  subject 
of  decision  in  another  form.  I  mean  on  the  question  of  ad- 
missibility of  evidence,  ^\'hene^'er  the  unauthorized  state- 
ments of  the  agent  are  not  in  law  the  statements  of  the 
principal,  they  would  not  be  admissible  in  evidence  against 
the  principal.    To  whatever  extent  they  are  admissible,  they 


36  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

must  in  law  be  considered  the  statements  of  and  binding  on 
the  principal. 

Xow,  what  is  the  rule  and  where  is  the  line  between 
admissibility  and  inadmissibility  drawn?  There  was  no 
more  careful  and  accurate  judge  than  Sir  William  Grant, 
and  he  states  the  rule  thus : — "What  the  agent  has  said  may 
be  what  constitutes  the  agreement  of  the  principal,  or  the 
representations  or  statements  may  be  the  foundation  of  or 
the  inducement  to  the  agreement.  Therefore,  if  writing  is 
not  necessary  by  law,  evidence  must  be  admitted  to  prove 
the  agent  did  make  that  statement  or  representation :"  Fair- 
lie  V.  Hastings,  lo  Ves.  126.  And  this,  said  Tindal,  C.  J., 
in  Garth  v.  Howard,  8  Bing.  451,  453  (E.  C.  L.  R.,  vol.  21 ), 
"is  the  leading  case  on  the  subject." 

Other  judges  have  laid  down  a  similar  rule.  In  Lang- 
ham  V.  Allnutt,  4  Taunt.  511,  519,  Gibbs,  C.  J.,  says: — 
"When  it  is  proved  A  is  agent  of  B,  whatever  A  does,  or 
says,  or  writes,  in  the  making  of  a  contract  as  agent  of  B, 
is  admissible  in  evidence,  because  it  is  part  of  the  <:ontract 
which  he  makes  for  B,  and  therefore  binds  B."  In  Doe  v. 
Martin,  4  T.  R.  39,  66,  Lord  Kenyon  says : — "Without  im- 
puting any  fraud  to  Martin,  and,  indeed,  it  is  negatived  by 
the  verdict,  the  maxim,  that  the  principal  is  civilly  responsi- 
ble for  the  acts  of  his  agent,  universally  prevails,  both  in 
Courts  of  law  and  equity;  and,  therefore,  whatever  mis- 
conduct and  fraud  are  imputed  to  Cruttenden,  it  must  affect 
his  principal,  Martin." 

It  remains  to  answer  some  of  the  objections  made.  It 
is  said  that  the  reason  why  no  action  could  be  maintained 
by  the  seller  on  the  contract  is,  that  the  principal  cannot 
stand  in  a  better  position  than  the  agent  who  actually  made 
the  contract ;  and  that  as  the  agent  could  not  sue  on  the  con- 
tract the  principal  cannot.  But  this  reasoning  applies  only 
to  derivative  rights.  Whereas  here  the  contract  is  the  prin- 
cipal's from  the  first  though  made  by  the  agent ;  and  as  his 
title  is  not  derivative  so  it  is  not  prejudicially  affected  by 
any  acts  but  those  which  are  in  the  eye  of  the  law  his  own. 


UDELL  z:  ATHERTON  37 

Another  principle  has  been  invoked,  as  it  seems  to  me 
improperly.  When  one  of  two  innocent  people  must  suffer, 
he  who  has  intrusted  the  fraudulent  agent  must  it  is  said 
be  content  to  bear  the  loss.  If  such  a  principle  applied  to 
this  case,  I  should  have  thought  that  he  who  intrusted  was 
the  seller  and  not  the  buyer,  who  was  deceived.  But  to  me 
it  appears  to  have  no  application.  It  applies,  as  it  seems  to 
me,  only  to  cases  in  which  by  the  fraud  of  the  agent  both 
parties,  he  who  employed  him  as  agent  and  he  who  dealt 
with  him,  have  been  defrauded.  Whereas  here  there  is 
only  one  sufferer,  the  other  being  largely  a  gainer  by  the 
deceit  as  matters  now  stand;  and  if  made  to  pay  the  excess 
of  price  back  would  still  retain  the  real  value  of  the  log. 

I  will  only  add  that  the  great  importance  of  the  ques- 
tion, and  the  sincere  respect  I  have  for  those  who  take  an 
opposite  view,  have  induced  me  thus  fully  to  vindicate  what 
I  believe  to  be  the  law,  in  favor  of  those  who  have  been 
cheated  and  against  those  who  claim  to  retain  the  proceeds 
of  the  cheat. 

Martin,  B.  This  action  was  tried  before  me  without 
a  jury,  and  the  facts  are  these:  The  defendants  authorized 
a  person  called  Youngman  to  sell  a  log  of  mahogany. 
Youngman  fraudulently  concealed  from  the  plaintiff  a  de- 
fect in  the  log,  who,  upon  the  assurance  that  it  was  sound, 
bought  it  at  3^'.  per  foot.  There  was  evidence  that  it  was 
not  worth  is.  3d.  The  price  was  payable  by  two  bills,  which 
were  given  to  the  defendants  and  paid  by  the  plaintiff.  The 
log  was  delivered  to  the  plaintiff  and  sawn  up,  and  partly 
used  by  him.  It  was  admitted  that  neither  directly  or  in- 
directly were  the  defendants  personally  guilty,  or  had  they 
any  knowledge  of  the  fraud ;  and  the  question  is,  whether 
they  are  liable  to  an  action  for  a  false  and  fraudulent  mis- 
representation. 

Tile  circumstance  that  the  defendants  have  received  the 
full  consideration  of  a  contract  which  the  plaintiff  might 
have  avoided  for  fraud,  and  the  alleged  injustice  of  permit- 
ting them  to  retain  the  price  of  t,s.  per  foot  for  an  article 


38  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

worth  only  is.  3d.,  and  which  price  was  agreed  to  be  paid 
by  the  plaintiff  upon  a  false  and  fraudulent  misrepresenta- 
tion made  by  the  agent  of  the  defendants,  has  been  strongly 
urged  as  creating  a  liability ;  but,  notwithstanding,  I  think 
there  is  none.  The  contract  was  procured  by  fraud,  and 
was  therefore  voidable  by  the  plaintiff.  It  was  not  void, 
for  the  plaintiff  might  have  insisted  upon  its  performance. 
It»was  voidable  at  his  election.  The  fraudulent  misrepre- 
sentation was  not  part  of  the  contract ;  it  was  a  collateral 
matter  which  would  have  entitled  the  plaintiff  to  have 
avoided  it.  There  would  have  been  no  legal  objection  to  the 
defendants  suing  as  plaintiffs  in  an  action;  but  it  is  clear 
that  a  plea  of  fraud  would  have  been  a  good  ansAver.  The 
plaintiff  only  knew  Youngman  in  the  transaction;  and 
although  the  defendants  might  sue  upon  the  contract,  they 
could  have  no  greater  right  against  the  plaintiff  than  Young- 
man  had,  and  as  the  plaintiff  would  have  an  answer  to  the 
action  if  brought  by  Youngman,  he  must  also  have  one  to 
an  action  brought  by  the  defendants.  So,  also,  I  apprehend, 
if  the  plaintiff  had  discovered  the  defect  before  he  had  so 
used  the  log  as  to  incapacitate  him  from  returning  it,  he 
might  have  returned  it  to  the  defendants  and  rescinded  the 
contract.  In  truth  the  contract  was  voidable  for  fraud 
against  every  one  so  long  as  it  was  executory  and  capable 
of  being  avoided.  But  the  contract  has  been  executed. 
The  plaintiff  has  taken  the  log  and  used  it,  and  the  de- 
fendants have  received  the  price,  and  whatever  remedy 
exists  for  the  plaintiff  must  be  by  way  of  action.  The  alle- 
gation in  the  declaration  upon  which  the  plaintiff's  right  of 
action  rests  is,  that  the  defendants  made  a  false  and  fraudu- 
lent representation.  But  how  can  it  be  said  with  truth  that 
the  defendants  made  such  a  representation?  They  them- 
selves never  made  it :  they  never  authorized  Youngman  to 
make  it ;  they  never  knew  of  it  until  long  afterwards  and 
until  after  the  contract  had  been  executed.  All  that  they 
did  was  to  authorize  Youngman  to  sell  the  log  honestly. 
No  doubt  they  afforded  the  occasion  upon  which  the  fraud- 


UDELL  v.  ATHERTON  39 

ulent  misrepresentation  was  made,  but  they  did  nothing 
more;  and  in  my  opinion  this  is  too  remote  to  render  them 
liable  to  this  action.  Youngman,  however,  is  clearly  liable 
upon  the  facts  as  assumed,  and  if  he  be  a  solvent  man  the 
plaintiff  may  obtain  from  him  the  redress  to  which  he  is 
entitled.  I  do  not  think  the  circumstance,  that  he  possibly 
may  be  a  person  not  capable  of  paying  damages,  is  one 
which  can  legally  be  taken  into  consideration  in  order  to 
determine  the  liability  of  the  defendants.  The  ability  to 
pay  does  not  affect  the  question  of  legal  liability  for  a 
wrong:  all  that  can  reasonably  be  required  is,  that  the  law 
should  afford  redress  against  the  individual  who  commits  it. 
For  these  reasons,  if  there  were  no  authorities  upon 
the  subject,  I  should  be  of  opinion  that  the  defendants  are 
not  responsible,  but  I  think  the  weight  of  authority  is  in 
favor  of  the  defendants.  It  is  true  there  are  dicta  of  most 
eminent  Judges  in  favor  of  the  action,  but  they  are  dicta 
only.  The  first  is  by  Lord  C.  J.  Tindal,  in  the  judgment  of 
the  Exchequer  Chamber  in  Wilson  v.  Fuller,  3  O.  B.  68 
(E.  C.  L.  R.  vol.  43),  that  a  principal  is  bound  in  a  civil 
action  by  a  fraudulent  concealment  of  which  his  agent  was 
guilty.  The  next  is  by  Baron  Parke  in  Cornfoot  v.  Fowke, 
6  M.  &  W.  ^"/T),  that  if  one  employ  an  agent  to  make  a 
contract,  and  that  agent  (though  his  principal  be  perfectly 
guiltless)  knowingly  commit  a  fraud  in  making  it,  not  only 
is  the  contract  void,  but  the  principal  is  liable  to  an  action, 
and  he  cites  Hern  v.  Nichols,  i  Salk.  289.  This  was  a 
j decision  at  nisi  priiis  by  Lord  Holt,  and,  as  in  many  other 
I  old  cases,  it  is  extremely  difficult  to  say  whether  it  was  an 
action  upon  a  warranty  or  one  for  deceit,  properly  so  called ; 
if  it  were  upon  a  warranty  or  contract  it  would  be  no  au- 
thority upon  the  present  point.  In  Coleman  v.  Riches,  here- 
inafter mentioned,  Air.  J.  Cresswell,  in  speaking  of  it,  says 
it  was  not  a  case  of  fraud.  So  also,  in  Murray  v.  Mann,  2 
Exch.  538,  Baron  Parke  again  said,  if  an  agent  be  found 
guilty  of  fraud  in  transacting  his  principal's  business  the 


40  AGENT'S  POWER  TO  SUBJECT  PRINXIPAL  TO  LIABILITY 

principal  is  responsible.  There  was  another  case  referred 
to,  Grammar  z'.  Nixon,  i  Str.  653,  but  in  reality  it  has  no 
bearing  upon  the  present.  It  was  the  case  of  a  servant,  not 
an  agent.  The  relation  of  master  and  servant  is  entirely 
different  from  that  of  a  principal  vendor  and  his  agent  or 
brokers  to  sell.  I  quite  agree  that  no  higher  authority  of 
the  kind  can  be  cited  than  the  opinions  of  Lord  C.  J.  Tindal 
and  Baron  Parke,  but,  upon  the  other  hand,  there  is  the 
authority  of  the  Lord  Chancellor,  Lord  Campbell,  in  Wilde 
7'.  Gibson,  i  H.  L.  605,  the  other  way.  He  there  says:  "In 
an  action  upon  contract  the  representation  of  an  agent  is 
the  representation  of  the  principal,  but  in  an  action  on  the 
case  for  deceit  the  misrepresentation  must  be  proved  against 
the  principal."  This,  in  my  opinion,  is  an  accurate  statement 
of  the  law.  But  I  think  this  case  is  concluded  by  adjudged 
cases.  In  the  case  of  Grant  7\  Norway,  10  C.  B.  665  (E.  C. 
L.  R.  vol  70),  where  the  master  of  a  ship  had  signed  bills 
of  lading  for  goods  which  had  never  been  shipped,  it  was 
held  that  his  doing  so  did  not  make  his  owner  responsible  to 
one  who  had  made  advances  upon  the  faith  of  the  bills  of 
lading.  That  is  a  much  stronger  case  than  the  present.  The 
master  of  the  ship  is  the  general  agent  of  the  owner;  Young- 
man  was  not  the  general  agent  of  the  defendants;  he  was 
merely  the  agent  to  sell  this  single  log.  The  representation 
of  the  master  was  a  false  and  fraudulent  misrepresentation ; 
it  was  false,  and  false  to  his  knowledge,  and  this  constitutes 
a  false  and  fraudulent  misrepresentation :  Pothill  v.  Walters, 
3  B.  &  Ad.  114  (E.  C.  L.  R.  vol.  23) ;  yet  the  owner  was 
held  not  to  be  responsible.  So  also,  in  Coleman  t'.  Riches, 
16  C.  B.  104  (E.  C.  L.  R.  vol.  81),  the  defendant  was  a 
wharfinger  at  Bristol,  and  one  Board  was  his  general  man- 
ager at  the  wharf.  The  plaintiff  had  bought  a  parcel  of 
wheat  from  one  Lewis ;  Board  signed  a  wharf  receipt,  in 
the  usual  form,  for  the  wheat  as  received  from  Lewis  at  the 
wharf.  Upon  the  production  of  the  receipt,  and  on  the 
faith  of  it,  the  plaintiff  paid  the  price  to  Lewis.     In  fact, 


UDELL  V.  ATHERTON  41 

the  wheat  had  not  been  deHvered,  and  the  receipt  was  fraud- 
ulently concocted  between  Lewis  and  Board.  The  Court  of 
Common  Pleas  held  that  the  defendant  was  not  liable  in  an 
action  for  a  false  and  fraudulent  misrepresentation.  This 
case  seems  to  me  in  point,  and  I  concur  with  what  Mr.  J. 
Cresswell  says,  which  I  think  applicable  to  the  present, 
"that  the  agent  was  employed,  not  to  make  statements,  but 
contracts."  It  has  been  decided  that  an  agent  to  sell  a 
chattel  has  not  authority  to  give  a  warranty  except  spe- 
cially authorized.  This  matter  was  much  discussed  in 
Coleman  v.  Riches,  i6  C.  B.  (E.  C.  L.  R.  vol.  8i),  and  i\Ir. 
J.  Cresswell  expresses  his  clear  opinion  that  the  agent  has  no 
such  authority,  and  this  is  in  accordance  with  principle. 
The  mere  authority  to  an  agent  to  sell  must  be  to  sell  ac- 
cording to  the  ordinary  rule  of  law,  and  that  is  caz'cat 
emptor.  But  the  point  has  been  expressly  decided  by  the 
Court  of  Common  Pleas  in  Brady  v.  Todd,  9  C.  B.,  N.  S. 
592  (E.  C.  L.  R.  vol.  99),  where  it  was  held  that  an  agent, 
being  a  servant,  authorized  to  sell  a  horse,  had  not  authority 
to  bind  his  master  by  a  warranty  that  the  horse  was  sound 
and  quiet  in  harness.  This  case  therefore  substantially 
overrules  the  nisi  prius  decision  in  Alexander  z'.  Gibson,  2 
Camp.  555.  If.  therefore,  an  agent  to  sell  has  not  authority 
to  bind  the  principal  by  a  warranty,  how  is  it  possible  that 
he  can  render  him  liable  as  upon  a  false  and  fraudulent  mis- 
representation? In  my  judgment,  therefore,  the  present 
case  is  concluded  by  adjudged  cases,  and  if  the  plaintiff  is 
to  succeed  it  ought  to  be  by  the  judgment  of  a  court  of  error. 
For  my  own  part,  as  I  have  already  said,  I  am  satisfied  upon 
legal  principle  the  defendants  are  not  liable.  I  use  the  tests 
applied  by  IMr.  J.  Cresswell  in  Coleman  z'.  Riches,  16  C.  B. 
104  (E.  C.  L.  R.  vol.  81 ).  First,  was  Youngman  in  fact  au- 
thorized by  the  defendants  to  make  the  representation?  He 
was  not.  Secondly,  was  his  situation  such  as  to  bring  the 
representation  he  made  within  the  score  of  his  authority? 
I  think  not.     He  was  employed  to  sell  in  accordance  with 


42  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

the  ordinary  rule  of  law,  but  he  was  not  employed  to  repre- 
sent that  to  be  true  which  he  knew  to  be  false. 

For  these  reasons  I  am  of  the  opinion  that  the  defend- 
ants are  not  responsible,  and  that  the  plaintiff  must  seek  his 
remedy  against  Youngman,  who,  upon  the  evidence  in  the 
case,  made  the  false  and  fraudulent  misrepresentation. 

Some  passages  were  referred  to  from  Mr.  Justice 
Story's  work,  and  also  some  placita  from  Rolle's  Abridg- 
ment. They  were  cited  to  the  Court  of  Common  Pleas  in 
the  cases  before  mentioned,  and  I  do  not  think  it  necessary  to 
refer  to  them. 

As  to  the  alleged  hardship  upon  the  plaintiff,  there  is 
none.  He  dealt  exclusively  with  Youngman,  and  if  he  be 
not  of  ability  to  pay,  the  plaintiff  is  only  in  the  condition  of 
all  persons  who  have  received  a  wrong  at  the  hands  of  a 
person  unable  to  make  redress.  As  to  the  defendants,  I  do 
not  know  the  authority  as  to  price  given  by  them  to  Young- 
man, but  it  may  have  been  that  he  was  not  to  sell  the  ma- 
hogany at  a  lower  price  than  3s.  per  foot ;  in  other  words, 
that  the  defendants  would  keep  their  wood  if  they  did  not 
receive  in  exchange  for  it  a  sum  of  money  equal  to  3s.  per 
foot.  Now  the  plaintiff  has  taken  the  log  and  has  used  it. 
By  reason  of  his  own  act  he  cannot  restore  it  to  the  defend- 
ants. Why  then  should  they  be  deprived  of  the  price  or 
any  part  of  it?  It  is  said  that  the  circumstance  of  the  de- 
fendants having  received  the  price  agreed  to  be  given  upon 
the  false  representation  made  by  their  agent,  renders  them 
liable  to  pay  the  difference  between  the  contract  price  and 
the  real  value.  But  is  this  so  in  reason  and  justice?  It  may 
well  have  been  that  the  defendants  insisted  that  no  lower 
price  should  be  accepted  than  3s.  per  foot.  If  the  log  had 
turned  out  worth  20s.  per  foot  the  plaintiff  would  have  had 
the  benefit.  The  defendants  may  have  only  received  what 
they  insisted  upon  having  before  they  parted  with  the  log. 
The  plaintiff  by  his  own  act  has  deprived  the  defendants  of 
the  possibility  of  its  ever  being  restored  to  them.     What 


UDELL  V.  ATHERTON  43 

right  has  he  in  reason  or  justice  to  deprive  the  defendants 
of  any  portion  of  that  price  which  they  may  have  insisted 
upon  having  before  they  parted  with  their  property?  If 
Youngman  has  committed  a  wrong  he  is  responsible  for  it ; 
but  why  are  the  defendants,  who  have  committed  none,  to 
be  deprived  of  their  property,  and  also  of  a  part  of  what 
may  have  been  the  stipulated  price?  The  maxim  of  law  is. 
In  pari  delicto  potior  est  conditio  defendentis.  I  think 
the  same  rule  ought  to  prevail  in  this  case,  where  there  is 
equal  innocence. 

The  result  of  our  judgment  is  that  the  rule  [to  take  off 
the  non-suit]  will  be  discharged. 


44  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 


BARWICK  z'.  ENGLISH  JOINT  STOCK  BANK. 
In  the  Exchequer  Chamber,   1867. 

Lazv  Reports,  2  Exchequer  Cases,  259.^ 

May  1 8.  The  judgment  of  the  Court  (Willes,  Black- 
burn, Keating,  Mellor,  JNIontague  Smith  and  Lush,  JJ.) 
was  dehvered  by 

Willes,  J. :  This  case,  in  which  the  Court  took  time  to 
consider  their  judgment,  arose  on  a  bill  of  exceptions  to  the 
ruling  of  my  Brother  ]\Iartin  at  the  trial  that  there  was  no 
evidence  to  go  to  the  jury. 

It  was  an  action  brought  for  an  alleged  fraud,  which 
was  described  in  the  pleadings  as  being  the  fraud  of  the 
bank,  but  which  the  plaintiff  alleged  to  have  been  committed 
by  the  manager  of  the  bank  in  the  course  of  conducting 
their  business.  At  the  trial,  two  witnesses  were  called,  first, 
Barwick,  the  plaintiff,  who  proved  that  he  had  been  in  the 
habit  of  supplying  oats  to  a  customer  of  the  bank  of  the 
name  of  Davis;  and  that  he  had  done  so  upon  a  guarantee 
given  to  him  by  the  bank,  through  their  manager,  the  effect 
of  which  probably  was,  that  the  drafts  of  the  plaintiff  upon 
Davis  were  to  be  paid,  subject  to  the  debt  of  the  bank. 
W^hat  were  the  precise  terms  of  the  guarantee  did  not 
appear,  but  it  seems  that  the  plaintiff  became  dissatisfied 
with  it,  and  refused  to  supply  more  oats  without  getting  a 


*  The  statement  of  facts  as  given  in  the  report,  and  the  Reporter's 
notes  of  the  arguments  of  counsel,  and  the  last  part  of  the  opinion 
relating  to  a  point  in  pleading  arc  omitted. 

Compare:  Rhoda  v.  Annis,  75  Mc.  17,  1883.  (B  was  the  owner 
of  a  farm.  B  employed  C  to  sell  the  farm.  In  the  course  of  the  nego- 
tiations for  the  sale  of  the  farm  to  A,  C  stated  "that  said  farm  for 
several  years  then  last  past  had  produced  and  cut  eighteen  tons  of 
hay  each  year."  This  and  other  similar  representations  were  false.  A 
sued  B  to  recover  damages  for  deceit.  The  Court  charged  the  jury 
that  the  "defendant  was  responsible  for  all  the  acts  and  representations 
of  her  agent  in  making  the  sale."  Judgment  for  plaintiff,  exceptions 
overruled.) 


BARWICK  z'.  EXGLISH  JOIXT  STOCK  BANK  45 

more  satisfactory  one;  that  he  applied  to  the  manager  of  the 
bank,  and  that  after  some  conversation  between  them,  a 
guarantee  was  given,  which  was  in  this  form : — 

"Dear  Sir — Referring  to  our  conversation  of  this 
morning,  I  beg  to  repeat  that  if  you  sell  to,  or  purchase  for, 
J.  Davis  &  Son  not  exceeding  looo  quarters  of  oats  for  the 
use  of  their  contract,  I  will  honor  the  cheque  of  Messrs.  J. 
Davis  &  Son  in  your  favor  in  payment  of  the  same,  on 
receipt  of  the  money  from  the  commissariat  in  payment  of 
forage  supplied  for  the  present  month,  in  priority  to  any 
other  payment,  except  to  this  bank;  and  provided,  as  I  ex- 
plained to  you,  that  they,  J.  Davis  &  Son,  are  able  to  con- 
tinue their  contract,  and  are  not  made  bankrupts. 

(Signed)  "Don.  M.  Dewar,  Manager." 

The  plaintiff  stated  that  in  the  course  of  conversation 
as  to  the  guarantee,  the  manager  told  him  that  whatever 
time  he  received  the  government  cheque,  the  plaintiff  should 
receive  the  money. 

Now,  that  being  the  state  of  things  upon  the  evidence 
of  the  plaintiff,  it  is  obvious  that  there  was  a  case  on  which 
the  jury  might  conclude,  if  they  thought  proper,  that  the 
guarantee  given  by  the  manager  was  represented  by  him  to 
be  a  guarantee  which  would  probably,  or  might  probably, 
be  paid,  and  that  the  plaintiff  took  the  guarantee,  supposing 
that  it  was  of  some  value,  and  that  the  cheque  would  prob- 
ably, or  might  probably,  be  paid.  But  if  the  manager  at  the 
time,  from  his  knowledge  of  the  accounts,  knew  that  it  was 
improbable  in  a  very  high  degree  that  it  would  be  paid,  and 
knew  and  intended  that  it  should  not  be  paid,  and  kept  back 
from  the  plaintiff  the  fact  which  made  the  payment  of  it 
improbable  to  the  extent  of  being  as  a  matter  of  business 
impossible,  the  jury  might  well  have  thought  (and  it  was  a 
matter  within  their  province  to  decide  upon)  that  he  had 
been  guilty  of  a  fraud  upon  the  plaintiff. 

Now,  was  there  evidence  that  such  knowledge  was  in 
the  mind  of  the  manager?    The  plaintiff  had  no  knowledge 


46  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

of  the  state  of  the  accounts,  and  the  manager  made  no  com- 
munication to  him  with  respect  to  it.  But  the  evidence  of 
Davis  was  given  for  the  purpose  of  supplying  that  part  of 
the  case;  and  he  stated  that,  immediately  before  the  guar- 
antee had  been  given,  he  went  to  the  manager,  and  told  him 
it  was  impossible  for  him  to  go  on  unless  he  got  further 
supplies,  and  that  the  government  were  buying  in  against 
him ;  to  which  the  manager  replied,  that  Davis  must  go  and 
try  his  friends ;  on  which  Davis  informed  the  manager  that 
the  plaintiff  would  go  no  further  unless  he  had  a  further 
guarantee.  Upon  that  the  manager  acted ;  and  Davis  added, 
"I  owed  the  bank  above  £12,000.''  The  result  was  that  oats 
were  supplied  by  the  plaintiff  to  Davis  to  the  amount  of 
£1227,  that  Davis  carried  out  his  contract  with  the  govern- 
ment, and  that  the  commissariat  paid  him  the  sum  of 
£2676,  which  was  paid  by  him  into  the  bank.  He  thereupon 
handed  a  cheque  to  the  plaintiff,  who  presented  it  to  the 
bank,  and  without  further  explanation  the  cheque  was  re- 
fused. 

This  is  the  plain  state  of  the  facts ;  and  it  was  contended 
on  behalf  of  the  bank  that,  inasmuch  as  the  guarantee  con- 
tains a  stipulation  that  the  plaintiff's  debt  should  be  paid 
subsequent  to  the  debt  of  the  bank,  which  was  to  have 
priority,  there  was  no  fraud.  We  are  unable  to  adopt  that 
conclusion.  I  speak  sparingly,  because  we  desire  not  to 
anticipate  the  judgment  which  the  constitutional  tribunal, 
the  jury,  may  pass.  But  they  might,  upon  these  facts*  justly 
come  to  the  conclusion  that  the  manager  knew  and  intended 
that  the  guarantee  should  be  unavailing;  that  he  procured 
for  his  employers,  the  bank,  the  government  cheque,  by 
keeping  back  from  the  plaintiff  the  state  of  Davis'  account, 
and  that  he  intended  to  do  so.  If  the  jury  took  that  view 
of  the  facts,  they  would  conclude  that  there  was  such  a  fraud 
in  the  manager  as  the  plaintiff  complained  of. 

If  there  be  fraud  in  the  manager,  then  arises  the  ques- 
tion, whether  it  was  such  a  fraud  as  the  bank,  his  employers, 


BARWICK  z:  ENGLISH  JOINT  STOCK  BANK  47 

would  be  answerable  for.  With  respect  to  that,  we  conceive 
we  are  in  no  respect  overruling  the  opinions  of  my  Brothers 
JMartin  and  Bramwell  in  Udell  v.  Athcrton,  the  case  most 
relied  upon  for  the  purpose  of  establishing  the  proposition 
that  the  principal  is  not  answerable  for  the  fraud  of  his 
agent.  Upon  looking  at  that  case,  it  seems  pretty  clear  that 
the  division  of  opinion  which  took  place  in  the  Court  of 
Exchequer  arose,  not  so  much  upon  the  question  whether  the 
principal  is  answerable  for  the  act  of  an  agent  in  the  course 
of  his  business — a  question  which  was  settled  as  early  as 
Lord  Holt's  time — but  in  applying  that  principle  to  the 
peculiar  facts  of  the  case ;  the  act  which  was  relied  upon 
there  as  constituting  a  liability  in  the  sellers  having  been  an 
act  adopted  by  them  under  peculiar  circumstances,  and  the 
author  of  that  act  not  being  their  general  agent  in  business, 
as  the  manager  of  a  bank  is.  But  with  respect  to  the  ques- 
tion, whether  a  principal  is  answerable  for  the  act  of  liis 
agent  in  the  course  of  his  master's  business,  and  for  his 
master's  benefit,  no  sensible  distinction  can  be  drawn  be- 
tween the  case  of  any  other  wrong.  The  general  rule  is, 
that  the  master  is  answerable  for  every  such  wrong  of  the 
servant  or  agent  as  is  committed  in  the  course  of  the  serv- 
ice and  for  the  master's  benefit,  though  no  express  com- 
mand or  privity  of  the  master  be  proved.  That  principle  is 
acted  upon  every  day  in  running  down  cases.  It  has  been 
applied  also  to  direct  trespass  to  goods,  as  in  the  case  of 
holding  the  owners  of  ships  liable  for  the  act  of  masters 
abroad,  improperly  selling  the  cargo.  It  has  been  held 
applicable  to  actions  of  false  imprisonment,  in  cases  where 
officers  of  railway  companies,  intrusted  with  the  execution 
of  by-laws  relating  to  imprisonment,  and  intending  to  act 
in  the  course  of  their  duty,  improperly  imprison  persons  who 
are  supposed  to  come  within  the  terms  of  the  by-laws.  It 
has  been  acted  upon  where  persons  employed  by  the  owners 
of  boats  to  navigate  them  and  to  take  fares,  have  com- 
mitted an  infringement  of  a  ferry,  or  such  like  wrong.     In 


48  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

all  these  cases  it  may  be  said,  as  it  was  said  here,  that  the 
master  has  not  authorized  the  act.  It  is  true,  he  had  not 
authorized  the  particular  act,  but  he  has  put  the  agent  in  his 
place  to  do  that  class  of  acts,  and  he  must  be  answerable 
for  the  manner  in  which  the  agent  has  conducted  himself 
in  doing  the  business  which  it  was  the  act  of  his  master 
to  place  him  in.  Venire  de  novo. 


ARMOUR  V.  MICHIGAN  CENTRAL  R.  R.  CO.  49 


ARMOUR  V.  MICHIGAN  CENTRAL  R.  R.  CO. 
Before  THE  Commission  of  Appeals,  New  York,  1&75. 

65  New  York  Reports,   in. 

Appeal  from  a  judgment  of  the  General  Term  of  the 
Superior  Court  of  the  city  of  New  York  affirming  a  judg- 
ment in  favor  of  defendant,  entered  upon  the  report  of  a 
referee.^ 

DwiGHT,  C. :  The  defendant  in  this  action  issued  at 
Chicago  to  the  plaintiffs,  on  October  7,  i><67,  a:  bill  of  lading 
of  100  tierces  of  lard  of  the  brand  "I.  T.  Suhd'erlaiid,  M.,'* 
containing  36,150  pounds.  The  bill  stated  that  t^e  lard  ws^s 
received  from  one  D.  D.  Michaels,  and  was  consigned  to  the 
plaintiffs,  and  was  to  be  transported  over  the  defendant's 
line  and  delivered  to  the  consignee  or  owner  at  New  York, 
the  owner  or  consignee  paying  freight.  The  bill  was  signed 
by  W.  W.  Street,  agent  for  the  defendants.  On  October 
12,  1867,  a  similar  bill  was  issued  by  the  defendant  to  the 
same  consignees  of  a  like  number  of  tierces  marked  "S.," 
also  received  from  Michaels,  which  were  to  be  also  trans- 
ported over  the  defendant's  line  and  delivered  to  the  con- 
signee or  owner  at  Ward's  inspection  yards.  New  York. 
This  bill  called  for  36,150  pounds  of  lard,  and  was  signed 
by  the  same  agent.  The  freight  in  each  case  was  not  to 
exceed  eighty-five  cents  per  100  pounds.  The  defendant, 
at  the  time  of  issuing  these  bills,  had  no  lard  in  its  posses- 
sion or  under  its  control.  It  was  induced  to  issue  them  from 
the  fact  that  Michaels  exhibited  to  Street  a  paper  purporting 
to  be  a  warehouse  receipt  of  one  I.  T.  Sunderland,  a  ware- 
houseman in  Chicago,  for  200  tierces  of  lard  in  favor  of 
Alichaels.     This  receipt  was  indorsed  over  to  the  defendant 


^  The  statement  of  facts  as  given  by  the  Reporter,  Iiis  notes  of  the 
arguments  of  counsel,  and  opinion  of  Gray,  C,  are  omitted. 


50  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

and  delivered  to  Street,  who,  on  the  faith  of  it,  issued  the 
two  bills  of  lading  already  described/  The  receipt  purport- 
ing" to  be  signed  by  Sunderland  was  a  forgery.  The  result 
was,  that,  though  the  defendant  had  issued  the  bills  of 
lading,  it  had  no  lard  to  represent  them,  nor  a  right  to  any 
lard  in  Sunderland's  warehouse  owned  by  Michaels.  The 
latter  person  had  an  interest  in  some  tierces  of  lard  there, 
but  on  that  a  firm,  known  as  Walbridge,  Watkins  &  Co.,  had 
a  prior  lien  and  were  entitled  to  the  possession.  The  de- 
fendant was  informed  by  Michaels,  at  the  time  that  the  bills 
of  lading  were  issued,  that  he  intended  to  use  them  at  bank 
on  the  days  on  which  they  were  respectively  dated.  No 
particular  inqui^'y  was  made  as  to  the  genuineness  of  the 
warehouse  recviipt;  the  defendant's  agent,  Street,  having 
confidence  in  Michaels,  and  having  constant  transactions 
v/ith  him.  At  the  times  above  specified,  Michaels  drew  his 
sight  drafts  on  the  plaintiffs,  payable  to  the  order  of  a  bank 
in  Chicago  in  two  sums  of  $3,600  each.  The  bills  of  lading 
accompanied  the  drafts,  which  were  accepted  and  paid  by  the 
plaintiffs  on  the  faith  thereof. 

As  between  the  common  carrier  and  the  plaintiffs,  this 
was  a  New  York  contract.  It  was  to  be  performed  in  New 
York,  and  the  acceptance  of  the  drafts  was  made  here. 

After  the  defendant  had  discovered  the  forgery  of  the 
warehouse  receipt,  made  over  to  it  by  ]\Iichaels,  on  October 
23,  it  commenced  a  replevin  suit  against  I.  T.  Sunderland, 
the  warehouseman  and  took  out  of  his  possession  197  tierces 
of  lard  and  shipped  them  to  New  York.  These  tierces  did 
not  have  the  same  brands  as  those  mentioned  in  the  forged 
receipts.  After  the  arrival  of  these  tierces  in  New  York, 
Walbridge,  A\^atkins  &  Co.  replevied  them  by  an  action  in 
the  Supreme  Court,  commenced  November  i,  1867,  against 
the  Hudson  River  Railroad  Company,  in  whose  possession 
they  were.  The  plaintiffs  received  formal  notice  of  this 
second  replevin  suit  on  December  10,  but  took  no  steps  to 
defend  the  action.  Judgment  was  suesequently  recovered 
by  Walbridge  &  Watkins  against  that  company,  it  being 


ARMOUR  v.  MICHIGAN  CENTRAL  R.  R.  CO.  51 

adjudged  tliat  they  had  the  right  to  recover  the  possession 
of  the  lard. 

The  plaintiffs  duly  demanded  the  lard  of  the  defend- 
ant.    Its  value  in  Xew  York,  after  deducting  freight,  was 

********* 

It  is  now  necessary  to  consider  how  far  the  fact 
that  the  company  had  no  lard  aft'ects  this  question.  This 
inquiry  divides  itself  into  two  branches.  One  concerns  t!:2 
power  of  Street  to  bind  the  company  by  issuing  bills  of 
lading  when  it  has  no  goods  to  correspond  with  the  bills. 
The  other  is  to  consider  the  eft'ect  of  the  bills,  assuming  that 
the  agent  had  the  requisite  authority.  The  defendant  insists 
that  Street  could  not  bind  it  by  issuing  fictitious  or  non- 
representative  bills  of  lading.  It  claims  that  his  authority 
was  confined  to  bills  for  goods  actually  within  its  control. 
It  cites,  to  this  effect,  Grant  z\  Norway  (lo  Com.  Bench, 
665)  ;  Schooner  Freeman  z:  Buckingham  (18  How.  [U.  S], 
182). 

Grant  z:  Norway  has  been  subject  to  much  and  severe 
criticism,  as  being  adverse  to  the  general  view  prevailing  in 
the  courts  of  this  State,  where  confidence  has  been  reposed 
in  an  agent  and  an  apparent  authority  conferred  upon  him, 
that  the  principal  must  suffer  from  an  actual  exercise  of 
authority  not  exceeding  the  appearance  of  that  which  is 
granted.  When  one  of  two  innocent  persons  must  suffer 
in  such  a  case,  that  person  must  bear  the  loss  who  reposed 
the  confidence.  So  far  as  Grant  r.  Norway  stands  in  the 
way  of  this  doctrine,  it  must  be  deemed  to  be  overruled. 
(Remarks  of  Davis,  J.,  in  N.  Y.  and  N.  H.  R.  R.  Co.  r. 
Schuyler,  34  N.  Y.  73. )  Grant  z'.  Norway,  however,  is  not 
precisely  parallel  with  the  present  case.  In  that  case  the  bill 
of  lading  was  issued  to  a  party  who  knew  that  the  bill  of 


'  His  discussion  of  the  question  of  what  would  have  been  the 
rights  of  the  plaintiff  in  case  the  defendant  had  had  the  lard  in  its 
possession  is  omitted. 


52  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

lading  was  issued  by  an  agent  without  authority,  and  was 
then  transferred  to  a  purchaser  acting  in  good  faith.  It 
may,  accordingly,  be  said  with  plausibility  that  the  represen- 
tation was  made  to  the  assignee,  who  simply  acquired  the 
title  of  the  fraudulent  consignee.  It  would  have  resembled 
the  case  at  bar  if  the  plaintiffs  had  known  of  the  forgery  of 
Michaels  when  they  took  the  bills  of  lading,  and  had  then 
transferred  them  to  persons  paying  value  and  acting  in 
good  faith.  The  case  would  then  have  been  governed  by  the 
rule  that  an  assignee  of  a  thing  in  action  must  abide  by  the 
case  of  him  of  whom  he  buys.  (Remarks  of  Selden,  J.,  in 
Griswold  v.  Haven,  25  N.  Y.  604-606. ) 

Street,  having  power  to  issue  bills  direct  to  consignees 
for  goods  actually  in  the  possession  of  the  defendant,  and 
the  present  bills  being  in  no  ways  distinguishable  in  form 
from  those  which  were  usually  employed,  he  must  be  con- 
sidered as  having  the  necessary  authority  as  to  the  plain- 
tiffs acting  in  good  faith. ^ 

All  concur,  except  Earl,  C,  dissenting. 

Judgment  reversed.^ 


^  In  the  rest  of  the  opinion  the  learned  Commission  maintains  that, 
assuming  Street  to  have  authority  to  sign  the  bill  of  lading,  the  defend- 
ant is  esLopped  from  denying  it  had  the  lard. 

*  Compare:  Pollard  z:  Vinton,  105  U.  S.  7,  1881.  (C  was  the 
general  agent  of  B  for  shipping  purposes  at  X.  C  signed  and  gave  to 
D  a  bill  of  lading  for  goods  purporting  to  have  been  shipped  on  B's  boat 
at  X.  No  such  goods  had  been  shipped.  D  assigned  the  bill  of  lading 
for  value  and  without  notice  of  the  fraud  to  A.  A  sued  B  for  the 
non-delivery  of  the  goods.  Judgment  for  B  affirmed.  ]\Iiller,  J.,  "This 
authority  [of  C's]  to  execute  and  deliver  bills  of  lading  has  two  limita- 
tions ;  namely,  they  could  only  be  delivered  to  shippers,  and  they  could 
only  be  delivered  for  freight  shipped  on  the  steamboat.  Before  the 
power  to  make  and  deliver  a  bill  of  lading  some  person  must  have 
shipped  goods  on  the  vessel."  p.  9.) 

Bank  of  Batavia  z'.  New  York,  Lake  Erie  and  Western  R.  R.  Co., 
106  N.  Y.  195,  1887.  (  C  was  the  agent  of  the  B  R.  R.  Co.  authorized  to 
issue  bills  of  lading  for  goods  received.  C  in  collusion  with  D  gave  D 
a  bill  of  lading  reciting  that  the  B  Co.  had  received  certain  goods  from 
D  for  shipment,  signing  the  bill  as  agent  for  the  B  Co.  No  such 
goods  had  been  i^eceived.  D  assigned  the  bill  of  lading  to  A  for  value. 
A  sued  the  B  Co.  for  the  non-delivery  of  the  goods  and  recovered. 
Judgment  afifirmed.  Finch,  J.:  "It  is  settled  doctrine  of  the  law  of 
agency  in  this  State  that  where  the  principal  has  clothed  his  agent  with 
power  to  do  an  act  upon  the  existence  of  some  extrinsic  fact  neces- 


ARMOUR  c'.  ^IICHIGAX  CENTRAL  R.  R.  CO.  53 

sarily  and  peculiarly  within  the  knowledge  of  the  agent,  and  of  the 
existence  of  which  the  act  of  executing  the  power  is  itself  a  represen- 
tation, a  third  person  dealing  with  such  agent  in  entire  good  faith, 
pursuant  to  the  apparent  power,  may  rely  upon  the  representation,  and 
the  principal  is  estopped  from  denying  its  truth  to  his  prejudice. 

"It  is  obvious,  also,  upon  the  case  as  presented,  that  the  fact  or 
condition  essential  to  the  authority  of  the  agent  to  issue  the  bills  of 
lading  was  one  unknown  to  the  bank  and  peculiarly  within  the-knowl- 
edge  of  the  agent  and  his  principal.  If  the  rule  compelled  the  trans- 
feree to  incur  the  peril  of  the  existence  or  absence  of  the  essential  fact, 
it  would  practically  end  the  large  volume  of  business  founded  upon 
transfers  of  bills  of  lading.  Of  whom  shall  the  lender  inquire,  and 
how  ascertain  the  fact  ?  Naturally  he  would  go  to  the  freight  agent, 
who  had  already  falsely  declared  in  writing  that  the  property  had  been 
received.  Is  he  any  more  authorized  to  make  the  verbal  representa- 
tion than  the  written  one?  Must  the  lender  get  permission  to  go 
through  the  freight  house  or  examine  the  books?  If  the  property  is 
grain,  it  may  not  be  easy  to  identify,  and  the  books,  if  disclosed,  are 
the  work  of  the  same  freight  agent.  It  seems  very  clear  that  the  vital 
fact  of  the  shipment  is  one  peculiarly  within  the  knowledge  of  the 
carrier  and  his  agent,  and  quite  certain  to  be  unknown  to  the  trans- 
feree of  the  bill  of  lading,  except  as  he  relies  upon  the  representation  of 
the  freight  agent." 

Phillips  V.  Mercantile  National  Bank,  140  N.  Y.  556,  1894.  (The 
Bank  B  appointed  C  cashier,  and  gave  him  authority  for  the  purposes  of 
the  bank  to  draw  checks  on  other  banks  in  favor  of  third  persons.  For 
his  own  fraudulent  purpose  he  drew  checks  on  the  A  bank  in  favor  of 
third  persons,  endorsed  the  names  of  the  payees,  collected  the  moneys 
from  A  through  a  broker,  and  absconded.  Held,  that  B  was  estopped 
from  denying  the  validity  of  the  checks.) 


54  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 


REYNOLDS  v.  WITTE. 
In  the  Supreme  Court  of  South  Carolina,  1879. 

13  South  Carolina  Reports,  5.' 

Mark  Reynolds  sent  to  his  agents,  J.  M.  Caldwell  & 
Sons,  certain  monies  to  invest  for  him,  Reynolds.  J.  M. 
Caldwell  &  Sons  lent  the  money  to  C.  O.  Witte  and  took 
from  him  notes  with  collateral  security.  It  was  the  under- 
standing of  all  i^arties  that  J.  M.  Caldwell  &  Sons  should 
collect  the  interest  and  the  principal  for  Reynolds  and  retain 
possession  of  the  collateral.  J.  M.  Caldwell  appropriated  the 
collateral  to  their  use  and  became  insolvent.  Witte  claimed 
that  he,  Witte.  had  a  right  to  recover  from  Reynolds  the 
value  of  the  collaterals.  The  controversy  was  submitted  to 
the  Circuit  Court  under  the  provisions  of  Section  389,  with- 
out action.  The  Circuit  Court  found  that  Reynolds  was  not 
liable  for  the  fraud  of  J.  M.  Caldwell  &  Co.  Witte  brought 
this  appeal. 

McGowAN,  A.  J. : 

There  is  nothing  to  distinguish  this  from  the  ordinary 
case  where  one,  for  convenience,  employs  another  to  act  as 
his  agent  in  a  particular  business,  or  to  exempt  Reynolds  and 
Caldwell  &  Sons  from  the  principles  which  ordinarily  attach 
to  the  relation  of  principal  and  agent.  Of  all  these  prin- 
ciples there  is  not  one  more  important  than  that  which  makes 
the  act  of  the  agent,  within  the  scope  of  his  authority,  the  act 
of  the  principal — "qtii  jack  per  aliuin,  facit  per  se."  Cald- 
well &  Sons  were  the  agents  of  Reynolds,  and  they  mis- 
appropriated, and  thereby,  for  the  purpose  of  this  case,  de- 
stroyed the  collaterals  of  Witte.    Is  Reynolds  liable  for  that 


^  The  facts  are  restated,  and  only  so  much  of  the  opinion  of  the 
Court  is  reprinted  as  relates  to  the  question  stated. 


REYNOLDS  f.  WITTE  55 

act?  If  Reynolds  himself  had  done  the  act  there  can  be 
no  doubt  that  he  would  have  been  liable  to  Witte.  Then 
what  is  his  responsibility  when  not  done  by  himself,  but  by 
his  agents?  ]\Iust  the  result  to  Witte  be  different  for  the 
reason  that  Reynolds  chose  to  perform  his  part  of  the-l)usi- 
ness  through  agents  selected  by  himself?  If  Caldwell  & 
Sons  as  the  agents  of  Reynolds  had  lost  these  collaterals  by 
negligence  merely,  if  they  had  left  their  safe  unlocked  and 
in  consequence  the  bonds  had  been  stolen,  it  is  conceded 
that  Reynolds  would  have  been  liable ;  but  it  is  insisted  that 
he  should  not  be  held  liable  for  the  loss  occasioned  by  their 
"criminal  act  ivilfully  committed." 

The  circuit  Judge  says :  "The  only  question  in  the  case 
is  whether  the  plaintiff  is  liable  for  the  wilful  misappropria- 
tion of  the  defendant's  securities  by  his  agent  in  the  absence 
of  all  fault  on  his  part.  The  law  seems  to  be  well  settled 
that  whilst  the  principal  is  liable  for  the  negligence  of  his 
agent,  he  is  not  liable  for  the  criminal  acts  wilfully  com- 
mitted by  him — such  acts  not  being  within  the  scope  of  his 
agency." 

It  may  be  true  that,  generally,  the  principal  is  not 
liable  criminally  for  the  acts  of  his  agent  done  without  his 
authority,  nor  civilly  to  third  persons  with  whom  he  has 
no  privity  for  his  wilful  trespasses. 

This  is  not  a  criminal  but  a  ciz'il  claim  to  charge  Reyn- 
olds with  the  value  of  the  collateral  appropriated  by  Cald- 
well &  Sons.  It  is  difficult  to  understand  upon  what  ground 
the  principal  should  be  held  liable  for  the  negligence  of  his 
agent  and  not  for  his  fraud,  where  the  act  is  done  or  omitted 
to  be  done  to  the  very  property  as  to  which  the  agency  exists 
and  in  the  course  of  the  agency.  Fraud  by  which  the  prop- 
erty is  lost  is  generally  considered  one  of  the  forms  of  gross 
negligence.  What  is  the  proper  understanding  of  the  phrase 
"within  the  scope  of  the  agency?"'  Does  "the  scope"  include 
negligence  and  exclude  fraud?  It  cannot  properly  be  re- 
stricted to  what  the  parties  intended  in  the  creation  of  the 
agency,  for  that  would  also  exclude  negligence,  as  no  agent 


56  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

is  appointed  for  the  purpose  of  being  negligent,  any  more 
than  for  the  purpose  of  acting  fraudulently.  The  question 
cannot  be  determined  by  the  authority  intended  to  be  con- 
ferred by  the  principal.  We  must  distinguish  between  the 
authority  to  commit  a  fraudulent  act  and  the  authority  to 
transact  the  business  in  the  course  of  which  the  fraudulent 
act  was  committed.  Tested  by  reference  to  the  intention 
of  the  principal,  neither  negligence  nor  fraud  is  within  "the 
scope  of  the  agency ;"  but  tested  by  the  connection  of  the 
act  with  the  property  and  business  of  the  agency,  fraud  in 
taking  the  very  property  is  as  much  "within  the  scope  of  the 
agency"  as  negligence  in  allowing  others  to  take  it.  The 
proper  inquiry  is,  zvhefhcr  the  act  zvas  done  in  the  course  of 
the  agency  and  by  virtue  of  the  authority  as  agent.  If  it  was, 
then  the  principal  is  responsible,  whether  the  act  was  merely 
negligent  or  fraudulent.  Here  the  fraudulent  act  was  the 
appropriation  of  the  very  property  of  the  agency — without 
which  agency  they  would  not  have  had  possession  of  the 
property  and  could  not  have  done  the  act. 

We  have  not  had  our  attention  directed  to  any  decided 
case  precisely  in  point,  nor  have  we  been  able  to  find  one, 
but  the  principles  announced  by  eminent  judges  and  elemen- 
tary writers  fully  cover  the  point. 

In  the  case  of  Scott,  Williams  &  Co.  v.  Joseph  Crews, 
2  S.  C.  522,  the  defendant,  Crews,  borrowed  money  from  the 
plaintiffs,  bankers,  gave  them  notes  for  the  money,  and 
secured  them  by  pledging  as  collateral  bills  of  the  bank  of 
the  State.  These  bills  were  not  fraudulently  appropriated 
by  the  bank,  but  were  taken  from  its  vaults  by  robbery.  The 
question  was  simply  one  of  negligence  as  bailees,  and  upon 
that  issue  the  plaintiffs  were  held  not  liable. 

The  case  of  Foster  et  al.,  Executors,  v.  President  and 
Directors  of  the  Essex  Bank,  17  Mass.  478,  comes  much 
nearer  the  precise  point  involved  here.  A  special  deposit  of 
$50,000  of  gold  was  made,  which  was  stolen  by  the  cashier 
and  the  chief  clerk  of  the  bank.  The  corporation  was  ex- 
onerated from  responsibility,  upon  the  grounds  that  it  was 


REYXOLDS  z:  WITTE  57 

a  gratuitous  deposit  without  compensation,  but  for  safe 
keeping  merely,  and  the  theft  was  not  the  act  of  the  corpora- 
tion, but  the  unauthorized  act  of  the  cashier  and  clerk,  out- 
side of  their  business  as  officers,  and  therefore  as  mere 
strangers.  The  whole  case  shows  that  if  the  corporation, 
through  its  proper  officers  and  as  its  own  act,  had  fraudu- 
lently appropriated  the  money,  the  court  would  have  held 
them  liable.  Chief  Justice  Parker,  in  delivering  the  judg- 
ment of  the  court,  states  the  principle  as  well  as  its  quali- 
fications. He  says :  "It  was  contended  by  one  of  the  counsel 
for  the  plaintiff,  as  a  proposition  universally  true,  that  the 
principal  is  civilly  answerable  for  all  frauds  done  by  his 
agents ;  and  he  is  supported  in  the  use  of  this  language  by  a 
doctrine  of  Lord  Kenyon,  in  the  case  of  Doe  r.  oMartin; 
and  also  by  Lord  Ellenborough  in  i  Camp.  127,  and  yet  it 
must  strike  the  mind  of  every  man  of  sense  that  this  univer- 
sal proposition  will  admit  of,  and,  indeed,  upon  principles 
of  common  sense,  actually  requires  qualifications.  No  one 
will  suppose,  if  my  servant  commits  a  fraud  relative  to  a 
subject  that  does  not  concern  his  duty  to  me,  that  I  shall 
be  civilly  answerable  for  such  fraud.  If  I  send  him  to  mar- 
ket and  he  steps  into  a  shop  and  steals,  or,  upon  false  pre- 
tences, cheats  the  shopkeeper  of  his  goods,  I  think  that  all 
mankind  would  agree  that  I  am  not  answerable  for  the 
goods  he  may  thus  unlawfully  acquire.  The  proposition 
can  be  true  only  when  the  agent  or  servant  is,  ivhile  com- 
mitting the  fraud,  acting  in  the  business  of  his  principal  or 
master." 

In  Story  on  Bailments,  it  is  said :  "But  good  faith 
alone  is  not  sufficient.  If  there  is  any  loss  occasioned  by 
their  negligence  or  mistake  or  inadvertence,  which  might 
fairly  have  been  guarded  against  by  ordinary  diligence,  they 
will  be  held  responsible  therefor;  and,  a  fortiori,  they  zvill 
be  held  responsible  ivhcn  they  are  guilty  of  any  misfeasance." 

In  Smith's  Mercantile  Law  it  is  said :  "The  principal 
has  been  thought  to  be  responsible,  not  rnerely  for  the  negli- 
gence, but  for  the  deliberate  fraud  of  his  agent  committed 


58  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

in  the  execution  of  his  employment,  though  without  the 
principal's  authority,  as,  for  instance,  by  selling  false  jewels 
for  true  ones."  The  reason  given  for  this  by  Lord  C.  J. 
Holt,  appears  a  sensible  one.  "Seeing,"  says  he,  "that  some 
one  must  be  loser  by  the  deceit,  it  is  more  reasonable  that 
he  wlio  employs  and  confides  in  the  deceiver,  should  be  the 
loser  than  a  stranger.  Such,  certainly,  was  the  opinion  of 
the  Roman  lawyers." 

The  principle  is  well  stated  in  Story  on  Agency,  Section 
452 :  "It  is  a  general  doctrine  of  law  that,  although  the 
principal  is  not  ordinarily  liable  (for  he  sometimes  is) 
in  a  criminal  suit  for  the  acts  or  misdeeds  of  his  agent, 
unless,  indeed,  he  has  authorized  or  co-operated  in  them, 
yet  he  is  held  liable  to  third  persons  in  a  civil  suit  for  the 
frauds,  deceits,  concealments,  misrepresentations,  negli- 
gences and  other  malfeasances,  misfeasances  and  omissions 
of  duty  of  his  agent,  in  tlic  course  of  his  employment, 
although  the  principal  did  not  authorize  or  justify  or  par- 
ticipate in,  or  indeed  know  of  such  misconduct,  or  even  if 
he  forbade  the  acts  or  disapproved  of  them.  In  all  such  cases 
the  rule  applies  respondeat  superior;  and  it  is  founded  upon 
public  policy  and  convenience,  for  in  no  other  way  could 
there  be  any  safety  to  third  persons  in  their  dealings,  either 
directly  with  the  principal  or  indirectly  with  him,  though 
the  instrumentality  of  agents.  In  every  such  case  the  prin- 
cipal holds  out  his  agent  as  competent  and  fit  to  be  trusted, 
and  thereby,  in  effect,  he  warrants  his  fidelity  and  good  con- 
duct in  all  matters  within  the  scope  of  the  agency." 

The  judgment  below  is  reversed  and  a  new  trial  or- 
dered. 

Willard,  C.  J.,  and  Mclver,  P.  J.,  concurred.- 


"Compare:  Foster  v.  The  Essex  Bank,  17  Mass.  479  1821.  (A  left 
at  the  bank,  B,  a  cask  containing  $50,000  in  gold.  The  bank,  through  its 
cashier,  C,  accepted  the  cask  "for  safe  keeping,"  but  the  bank  received 
no  reward.  A  gave  several  orders  on  the  bank  to  pay  out  different  sums 
of  money  from  the  cask  to  the  holders  of  the  orders,  and  the  cask  was 
opened  by  C  for  this  purpose.     C  took  and  converted  to  his  own  use 


REYNOLDS  v.  WITTE  59 

$32,000  out  of  the  cask.  After  A's  decease,  C  gave  to  his  executors 
a  memorandum  signed  by  C  as  cashier,  admitting  that  the  bank  had 
on  special  deposit  for  them  as  executors  the  amount  deposited  by  A 
less  only  A's  drafts.  Held,  that  it  was  within  the  province  of  the  bank 
to  receive  the  deposit ;  that  the  extent  of  the  bank's  duty  as  bailee 
was  to  keep  as  their  goods  of  a  similar  kind ;  that  the  bank  would  be 
liable  for  the  fraud  of  their  agent  when  the  agent  was  acting  within 
the  scope  of  his  authority;  that  the  cashier  when  he  went  to  the  cask 
to  abstract  the  gold  was  not  acting  within  the  scope  of  his  authority, 
and  that,  therefore,  as  between  the  executors  of  A  and  the  bank,  the 
loss  resulting  from  C's  fraud  should  fall  on  the  estate  of  A.) 

Dougherty  v.  Wells,  Fargo  &  Co.,  7  Nev.  368,  1872.  (A  held  a 
certificate  of  deposit  given  him  by  the  B  Express  Company  at  Y.  C 
was  B  Co.'s  agent  at  X.  A  gave  C  the  certificate  with  directions  to 
send  to  Y,  have  renewed,  and  returned  to  him.  A,  at  X.  C  obtained 
the  money  on  the  certificate,  and  did  not  return  to  A  either  the  money 
or  the  certificate.  A  sued  the  B  Co.  Held,  on  appeal  that  the  plaintiff 
could  recover,  on  the  ground  that  C  was  held  out  by  the  B  Co.  as  a 
person  to  be  trusted  as  their  agent  in  the  character  of  business 
committed  to  him  by  A.  p.  373.) 


60  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 


THE  BRITISH  MUTUAL  BANKING  CO.  v.  CHARN- 
WOOD  FOREST  RAILWAY  CO. 

In  the  Court  of  Appeal,   1887. 

Lazv  Reports,  18  Queen's  Bench  Division,  714. 

Appeal  from  an  order  of  the  Queen's  Bench  Division 
(Manisty  and  Mathew,  ]].)  directing  judgment  to  be 
entered  for  the  plaintiffs. 

The  action  was  brought  to  recover  damages  for  fraud- 
ulent misrepresentations  alleged  to  have  been  made  by  the 
defendants  through  their  secretary.  At  the  trial  before 
Lord  Coleridge,  C.  J.,  it  appeared  that  certain  customers 
of  the  plaintiffs  had  applied  to  them  for  an  advance  on 
the  security  of  transfers  of  debenture  stock  of  the  defend- 
ant company.  The  plaintiffs'  manager  called  upon  Tre- 
mayne,  the  defendants'  secretary,  and  was  informed  in  effect 
that  the  transfers  were  valid,  and  that  the  stock  which  they 
purported  to  transfer  existed.  The  plaintiffs  thereupon  made 
the  advances.  It  subsequently  appeared  that  Tremayne,  in 
conjunction  with  one  Maddison,  had  fraudulently  issued 
certificates  for  debenture  stock  in  excess  of  the  amount 
which  the  company  were  authorized  to  issue,  and  the  trans- 
fers as  to  which  the  plaintiffs  inquired  related  to  this  over 
issue.  The  plaintiffs  accordingly  lost  their  security.  The 
defendants  did  not  benefit  in  any  way  by  the  false  state- 
ments of  Tremayne,  which  were  made  entirely  in  the  inter- 
est of  himself  and  Maddison.  There  was  some  question 
whether  Tremayne  was  still  secretary  at  the  time  the  state- 
ments were  made,  but  the  jury  found  that  the  inquiries 
were  made  of  him  as  secretary,  and  that  the  defendants 
held  him  out  as  such  to  answer  such  inquiries.  The  jury 
assessed  the  damages,  and  the  Chief  Justice  left  either  of 
the  parties  to  move  for  judgment.     A  motion  was  accord- 


BAXKIXG  CO.  z:  CHARXWOOD  FOREST  RAILWAY  CO.   61 

ingly  made  on  behalf  of  the  plaintiffs  before  ]\Ianisty  and 
Mathew,  ]].,  who  directed  judgment  to  be  entered  for  them. 
The  defendants  appealed.^ 

Lord  Esher,  ]\I.  R.  In  this  case  an  action  ha^  been 
brought  by  the  plaintiff's  to  recover  damages  for  fraudulent 
misrepresentation  by  the  defendants,  through  their  secre- 
tary, as  to  the  validity  of  certain  debenture  stock  of  the  de- 
fendant company.  The  defendants  are  a  corporation,  and 
the  alleged  misrepresentations  were  in  fact  made  by  a  person 
employed  in  the  capacity  of  their  secretary,  and  it  cannot 
be  doubted  that  when  he  made  the  statements  he  had  a 
fraudulent  mind,  and  made  them  knowing  them  to  be  false. 

I  differ  from  the  judgment  of  the  Divisional  Court, 
but  I  do  not  think  the  ground  on  which  my  decision  is  based 
was  present  to  the  minds  of  the  learned  judges.  The  point 
principally  argued  in  the  Divisional  Court  seems  to  have 
been  that  the  defendants  could  not  be  liable  on  account  of 
their  being  a  corporation.  It  seems  to  me,  however,  that 
there  is  a  defect  in  the  plaintiffs'  case  irrespective  of  the 
question  whether  the  defendants  were  a  corporation  or  not. 
The  secretary  was  held  out  by  the  defendants  as  a  person  to 
answer  such  questions  as  those  put  to  him  in  the  interest 
of  the  plaintiffs,  and  if  he  had  answered  them  falsely  on 
behalf  of  the  defendants,  he  being  then  authorized  by  them 
to  give  answers  for  them,  it  may  well  be  that  they  would  be 
liable.  But  although  what  the  secretary  stated  related  to 
matters  about  which  he  was  authorized  to  give  answers, 
he  did  not  make  the  statements  for  the  defendants  but  for 
himself.  He  had  a  friend  whom  he  desired  to  assist  and 
could  assist  by  making  the  false  statements,  and  as  he  made 
them  in  his  own  interest  or  to  assist  his  friend,  he  was  not 
acting  for  the  defendants.  The  rule  has  often  been  ex- 
pressed in  the  terms,  that  to  bind  the  principal  the  agent 
must  be  acting  "for  the  benefit"  of  the  principal.     This, 


^  The  Reporter's  notes  of  the  argument  of  counsel  are  omitted. 


62  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

in  my  opinion,  is  equivalent  to  saying  that  he  must  be  act- 
ing "for"  the  principal,  since  if  there  is  authority  to  do  the 
act  it  does  not  matter  if  the  principal  is  benefited  by  it.  I 
know  of  no  case  where  the  employer  has  been  held  liable 
when  his  servant  has  made  statements  not  for  his  em- 
ployer, but  in  his  own  interest.  The  attention  of  the  learned 
judges  seems  to  have  been  drawn  off  from  this  view  of  the 
case  by  the  argument  founded  on  the  defendants  being  a 
corporation,  and  I  think  their  judgment  must  be  overruled.- 


^The  opinion  of  Bowen,  L.  J.,  and  Fry,  L.  J.,  who  concurred  in 
allowing  the  appeal,  are  omitted.  Fry,  L.  J.,  follows  the  reasoning  of 
the  Master  of  the  Rolls;  Bowen,  L.  J.,  while  maintaining  that  a  prin- 
cipal cannot  be  held  liable  for  a  deceit  committed  by  his  agent  for  the 
agent's  benefit,  holds  that  in  this  case,  had  the  directors  of  the  corpora- 
tion authorized  the  deceit,  as  such  an  action  was  beyond  the  power  of 
the  corporation,  the  plaintiff  could  not  have  held  the  corporation  liable 
in  damages. 


M'MANUS  z:  CRICKETT  63 


SECTION  2.— LIABILITY  FOR  POSITIVE  MIS- 
FEASANCE CONTINUED— WILFUL  INJURY 
BY  SERVANT. 


M'MANUS  r.  CRICKETT. 
In  the  Court  of  King's  Bench,  1800. 

I  East's  Reports,  106. 

This  case  was  very  much  discussed  at  the  bar,  upon  a 
motion  to  set  aside  a  verdict  for  the  plaintiff  and  enter  a 
nonsuit,  by  Gibbs  and  Wood,  against  the  rule,  and  Gar- 
row  and  Giles  in  support  of  it.  The  Court  took  time  to 
consider  of  their  judgment ;  and  afterwards  entered  so  fully 
into  the  cases  cited  and  the  arguments  urged  at  the  bar,  that 
it  is  unnecessary  to  detail  them  in  the  usual  form. 

Lord  Kenyon,  C.  J.,  now  delivered  the  unanimous 
opinion  of  the  Court. 

This  is  an  action  of  trespass,  in  which  the  declaration 
charges  that  the  defendant  with  force  and  arms  drove  a 
certain  chariot  against  a  chaise  in  which  the  plaintiff  was 
riding  in  the  king's  highway,  by  which  the  plaintiff  was 
thrown  from  his  chaise  and  greatly  hurt.  At  the  trial  it 
appeared  in  evidence  that  one  Brown,  a  servant  of  the  de- 
fendant, wilfully  drove  the  chariot  against  the  plaintift"s 
chaise,  but  that  the  defendant  was  not  himself  present, 
nor  did  he  in  any  manner  direct  or  assent  to  the  act  of  the 
servant,  and  the  question  is,  if  for  this  wilful  and  designed 
act  of  the  servant  an  action  of  trespass  lies  against  the  de- 
fendant his  master?  As  this  is  a  question  of  ven,-  general 
extent,  and  as  cases  were  cited  at  the  bar.  where  verdicts 
had  been  obtained  against  masters  for  the  misconduct  of 
their  servants  under  similar  circumstances,  we  were  desir- 
ous of  looking  into  the  authorities  on  the  subject  before 


64     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

we  gave  our  opinion;  and  after  an  examination  of  all  that 
we  could  find  as  to  this  point,  we  think  that  this  action 
cannot  be  maintained.  It  is  a  question  of  very  general 
concern  and  has  been  often  canvassed ;  but  I  hope  at  last 
it  will  be  at  rest.  It  is  said  in  Bro.  Abr.  tit.  Trespass,  pi. 
435  :  "If  my  servant  contrary  to  my  will  chase  my  beasts 
into  the  soil  of  another  I  shall  not  be  punished."  And 
in  2  Roll.  Abr.  553:  "If  my  servant  without  my  notice 
put  my  beasts  into  another's  land,  my  servant  is  the  tres- 
passer and  not  I — because  by  the  voluntary  putting  of  the 
beasts  there  without  my  assent,  he  gains  a  special  property 
for  the  time,  and  so  to  this  purpose  they  are  his  beasts." 
I  have  looked  into  the  correspondent  part  in  Vin.  Abr. 
and  as  he  has  not  produced  any  case  contrary  to  this,  I 
am  satisfied  with  the  authority  of  it.  And  in  Noy's  Max- 
ims, ch.  44.  "If  I  command  my  servant  to  distrain,  and 
he  ride  on  the  distress,  he  shall  be  punished  not  I."  And 
it  is  laid  down  by  Holt,  C.  J.,  in  Middleton  v.  Fowler, 
Salk.  282  as  a  general  position,  "that  no  master  is  charge- 
able with  the  acts  of  his  servant  but  when  he  acts  in  the 
execution  of  the  authority  given  him."  Now  when  a 
servant  quits  sight  of  the  object  for  which  he  is  employed, 
and  without  having  in  view  his  master's  orders  pursues 
that  which  his  own  malice  suggests,  he  no  longer  acts  in 
pursuance  of  the  authority  given  him,  and  according  to  the 
doctrine  of  Lord  Holt  his  master  will  not  be  answerable 
for  such  act.  Such  upon  the  evidence  was  the  present  case ; 
and  the  technical  reason  in  2  Roll.  Abr.  with  respect  to 
the  sheep  applies  here;  and  it  may  be  said  that  the  servant 
by  wilfully  driving  the  chariot  against  the  plaintiff's  chaise 
without  his  master's  assent  gained  a  special  property  for 
the  time,  and  so  to  that  purpose  the  chariot  was  the  ser- 
vant's. This  doctrine  does  not  at  all  militate  with  the  cases 
in  which  a  master  has  been  holden  liable  for  the  mischief 
arising  from  the  negligence  or  unskilfulness  of  his  ser- 
vant who  had  not  purpose  but  the  execution  of  his  master's 
orders ;  but  the  form  of  those  actions  proves  that  this  action 


M'MAXUS  i:  CRICKETT  65 

of  trespass  cannot  be  maintained;  for  if  it  can  be  sup- 
ported, it  must  be  upon  the  ground  that  in  trespass  all  are 
principals ;  but  the  form  of  those  actions  shows,  that  where 
the  servant  is  in  point  of  law  a  trespasser,  the  master  is 
not  chargeable  as  such ;  though  liable  to  make  a  compensa- 
tion for  the  damage  consecjuential  from  his  employing  of 
an  unskilful  or  negligent  servant.  The  act  of  the  master 
i?  the  employment  of  the  servant ;  but  from  that  no  im- 
mediate prejudice  arises  to  those  who  may  suffer  from 
some  subsequent  act  of  the  servant.  If  this  were  other- 
wise the  plaintiffs  in  the  cases  mentioned  in  i  Lord  Raym. 
739.  (one  where  the  servants  of  a  carman  through  negli- 
gence ran  over  a  boy  in  the  streets  and  maimed  him ;  and 
the  other,  where  the  sers-ants  of  A  with  his  cart  ran 
against  the  cart  of  B  and  overturned  it,  by  which  a  pipe  of 
wine  was  spilt;)  must  have  been  nonsuited  from  their  mis- 
taking the  proper  form  of  action,  in  bringing  an  action 
upon  the  case,  instead  of  an  action  of  trespass;  for  there 
is  no  doubt  of  the  servants  in  those  cases  being  liable  as 
trespassers,  even  though  they  intended  no  mischief ;  for 
which,  if  it  was  necessary,  Weaver  v.  Ward  in  Hobart  134, 
and  Dickinson  v.  Watson  in  Sir  Thomas  Jones  205,  are 
authorities.  But  it  must  not  be  inferred  from  this  that  in 
all  cases  where  an  action  is  brought  against  the  servant  for 
improperly  conducting  his  master's  carriage,  by  which  mis- 
chief happens  to  another,  the  action  must  be  trespass. 
Michael  v.  Allcstrec  in  2  Levinz  172,  where  an  action  on 
the  case  was  brought  against  a  man  and  his  servant  for 
breaking  a  pair  of  horses  in  Lincoln's  Inn  Fields,  where 
being  unmanageable  they  ran  away  with  the  carriage  and 
hurt  the  plaintiff's  wife,  is  an  instance  to  shew  that  tres- 
pass on  the  case  may  be  the  proper  form  of  action.  And 
upon  a  distinction  between  those  cases  where  the  mischief 
immediately  proceeds  from  something  in  which  the  defend- 
ant is  himself  active,  and  where  it  may  arise  from  the 
neglect  or  other  misconduct  of  the  party,  but  not  immedi- 
ately, and  which  perhaps  may  amount  only  to  a  non-fea- 


66     AGENTS  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

zance,  we  held  in  Ogle  v.  Barnes,  8  Term  Rep.  i88,  that  the 
plaintiff  was  entitled  to  recover.  The  case  of  Savignac 
and  Roome,  6  Term  Rep.  125,  which  was  much  pressed  as 
supporting  this  action,  came  before  the  Court  on  a  motion 
in  arrest  of  judgment ;  and  the  only  question  decided  by 
the  Court  was,  that  the  plaintiff  could  not  have  judgment, 
as  it  appeared  that  he  had  brought  an  action  on  the  case  for 
that  which  in  law  was  a  trespass :  for  the  declaration  there 
stated  that  the  defendant  by  his  servant  wilfully  drove 
his  coach  against  the  plaintiff's  chaise.  Day  v.  Edzvards, 
5  Term  Rep.  648  was  also  mentioned;  which  was  an  ac- 
tion on  the  case,  in  which  the  declaration  charged  the  de- 
fendant personally  with  furiously  and  negligently  driving 
his  cart,  that  by  and  through  the  furious  negligent  and  im- 
proper conduct  of  the  defendant  the  said  cart  was  driven 
and  struck  against  the  plaintiff's  carriage :  and  on  demurrer 
the  Court  were  of  opinion,  that  the  fact  complained  of  was 
a  trespass.  And  in  the  last  case  that  was  mentioned  of 
Br  lick  er  v.  Fromcnt,  6  Term  Rep.  659  the  only  point 
agitated  was,  whether  evidence  of  the  defendant's  servant 
having  negligently  managed  a  cart  supported  the  declara- 
tion, which  imputed  that  negligence  to  the  defendant :  and 
the  Court  with  reluctance  held  that  it  did,  on  the  authority 
of  a  precedent  in  Lord  Raymond's  Reports  264  of  Turbes- 
ville  and  Stamp.  In  none  of  these  cases  was  the  point  now 
in  question  decided ;  and  those  determinations  do  not  con- 
tradict the  opinion  we  now  entertain,  which  is,  that  the 
plaintiff  cannot  recover,  and  that  a  nonsuit  must  be  en- 
tered. 

Per  Curiam,  Rule  absolute  for  entering  a  nonsuit.^ 


^Compare:  Bowcher  v.  Noirdstrom,  i  Tauton,  568,  1809.  (B  was 
the  captain  of  a  vessel.  He  was  asleep  in  the  cabin,  and  the  vessel  was 
in  charge  of  the  pilot.  The  vessel  became  entangled  with  A's  vessel, 
which  was  at  anchor.  The  pilot  to  extricate  B's  vessel  ordered  a  sailor 
to  cut  the  hawser  attached  to  A's  vessel,  which  was  done.  A  brought 
an  action  of  trespass  against  B.  Verdict  for  A.  Rule  nisi  to  set  aside 
the  verdict.  Rule  absolute.  "The  Court  held  that  it  did  not  appear 
that  the  captain  had  done  any  act  in  this  case."  Sed  queare,  if  trespass 
on  the  case  could  have  been  brought?) 


^I'MAXUS  z:  CRICKETT  67 

Croft  r.  Alison,  4  Barn.  &  Aid.  Rpo,  1821.  (A  was  owner  of  a 
certain  chariot.  The  chariot  was  stanaing  in  the  road  when  it  became 
entangled  with  a  coach  belonging  to  B  and  driven  by  B's  servant,  C. 
C  struck  the  horses  of  A ;  they  moved  forward  and  the  chariot  was 
overturned  and  damaged,  for  which  damage  A  sued  B.  The  Court 
charged  the  jury  that  if  the  original  entangling  arose  from  the  fault  of 
C,  then  the  verdict  should  be  for  A.  Per  curiam :  'Tf  a  servant 
driv.ing  a  carriage,  in  order  to  effect  some  purpose  of  his  own,  wan- 
tonly strike  the  korses  of  another  person,  and  produce  the  accident,  the 
master  will  not  be  liable.  But  if,  in  order  to  perform  his  master's 
orders,  he  strikes  but  injudiciously,  and  in  order  to  extricate  himself 
from  a  difficulty,  that  will  be  negligent  and  careless  conduct,  for  which 
the  master  will  be  liable,  being  an  act  done  in  pursuance  of  the 
servant's  employment.") 


68     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 


WRIGHT  V.  WILCOX. 

In  the  Supreme  Court  of  Judicature  of  New  York, 

1838. 

19  Wendell's  Reports,  343. 

The  suit  was  brought  for  an  injury  sustained  by  the 
son  of  the  plaintiff,  who  was  a  minor,  in  being  run  over  by  a 
wagon  driven  by  S.  Wilcox,  the  son  of  J.  Wilcox,  whilst  in 
the  employment  of  the  father.  The  plaintiff's  son  was  a 
very  young  lad,  and  on  his  way  to  school  asked  S.  Wilcox 
to  permit  him  to  ride;  who  answered  that  he  might  do  so, 
when  he  got  up  a  hill  which  he  was  then  ascending.  When 
the  hill  was  ascended,  the  lad  took  hold  of  the  side  of  the 
wagon  between  the  front  and  hind  wheels.  S.  Wilcox  did 
not  stop  his  team.  He  was  cautioned  by  a  by-stander  that 
if  he  did  not  stop  he  would  kill  the  boy.  He  looked  be- 
hind him;  the  horses  were  then  walking;  and  seeing  the 
plaintiff's  son  and  other  boys  attempting  to  get  on  the 
wagon,  he  cracked  his  whip  and  put  the  horses  upon  a  trot. 
The  plaintiff's  son  fell  and  one  of  the  hind  wheels  passed 
over  him,  and  greatly  injured  him.  A  joint  action  was 
brought  against  the  defendants.  A  motion  was  made  for  a 
nonsuit,  which  was  denied.  The  judge  charged  the  jury, 
that  both  defendants  were  answerable  whether  the  injury 
was  wilful,  or  only  attributable  to  negligence.  The  jury 
found  a  verdict  for  the  plaintiff  against  both  defendants 
with  $109  damages.     A  motion  was  made  for  a  new  trial.  ^ 

CowEN,  J. :  It  is  impossible  to  sustain  this  verdict 
aeainst  the  father.  It  is  difficult  to  infer  from  the  evidence, 
anything  short  of  a  design  in  Stephen  the  servant,  to  throw 
the  plaintiff's  boy   from  the  wagon;  and  the  judge,   as  I 


^  The  statement  of  facts  is  slightly  abbreviated  and  the  parts  of  the 
opinion  dealing  with  questions  of  practice  are  omitted. 


WRIGHT  z:  WILCOX  69 

understand  the  charge,  told  the  jur>^  that  the  defendants 
were  jointly  liable  in  that  view.  If  Stephen,  in  whipping 
the  horses,  acted  with  the  wilful  intention  to  throw  the 
plaintiff's  boy  off,  it  was  a  plain  trespass,  and  nothing 
but  a  trespass,  for  which  the  master  of  Stephen  is  no 
more  liable  than  if  his  servant  had  committed  any  other 
assault  and  battery.  xA-ll  the  cases  agree  that  a  master  is 
not  liable  for  the  wilful  mischief  of  his  servant,  though 
he  be  at  the  time,  in  other  respects,  engaged  in  the  ser- 
vice of  the  former,  i  Chit.  PI.  69,  ed.  of  1828.  M'Manus 
V.  Crickett,  i  East,  106.  Ham.  on  Part,  to  Actions,  83. 
Croft  V.  Alison,  4  Barn.  &  Aid.  590.  i  Chit.  Gen.  Pr.  80. 
Brozvcher  v.  Noidstrom,  i  Taunt.  568.  Why  is  the  master 
chargeable  for  the  act  of  his  servant?  Because,  what  a 
man  does  by  another  he  does  by  himself.  The  act  is 
within  the  scope  of  the  agency.  Reeve's  Dom.  Rel.  357.  "A 
master  is  not  answerable,"  says  ]\Ir.  Hammond,  "for  every 
act  of  his  servant's  life,  but  only  for  those  done  in  his 
relative  capacity.  To  charge  the  master,  it  must  always 
be  shown  or  presumed,  that  the  relation  of  master  and 
servant  subsisted  between  them  in  the  particular  affair. 
If  the  master  is  liable  under  other  circumstances,  he  is  so, 
not  quatcniis  master,  but  as  any  one  would  be  who  in- 
stigates an  injury."  The  dividing  line  is  the  wilfulness  of 
the  act.  If  the  servant  make  a  careless  mistake  of  com- 
mission or  omission,  the  law  holds  it  to  be  the  master's 
business  negligently  done.  It  is  of  the  very  nature  of 
business  that  it  may  be  well  or  ill  done.  We  frequently 
speak  of  a  cautious  or  careless  driver  in  another's  emplov- 
ment.  Either  may  be  in  the  pursuit  of  his  master's  busi- 
ness, and  negligence  in  servants  is  so  common,  that  the 
law  will  hold  the  master  to  the  consequences  as  a  thing  that 
he  is  bound  to  foresee,  and  provide  against.  But  it  is  dif- 
ferent with  a  wilful  act  of  mischief.  To  subject  the  master 
in  such  a  case,  it  must  be  proved  that  he  actually  assented, 
for  the  law  will  not  imply  assent.  In  the  particular  affair, 
there  is,  then,  no  longer  the  presumed  relation  of  master 


70     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

and  servant.  The  distinction  seems  to  resolve  itself  into 
a  question  of  evidence.  A  man  shall  be  presumed  to  intend 
the  ordinary  consequences  of  his  own  acts;  and  especially 
so  far  as  such  consequences  may  be  innocent  of  all  evil 
intention;  for  these  he  may  be  safely  held  accountable.  But 
for  those  which  are  remote  or  barely  possible,  he  is  not  ac- 
countable; and  if  they  be  at  the  same  time  criminal,  it 
would  be  violating  one  of  the  plainest  principles  of  pre- 
sumptive evidence  to  say  that  he  intended  them.  "The 
master's  liability  has  never  been  questioned,"  says  Judge 
Reeve,  "when  a  servant  does  an  act  injurious  to  another, 
through  negligence  or  ivant  of  skill,  on  the  principle  that 
the  master  should  at  his  peril  employ  servants  who  are 
skilful  or  careful."  Reeve's  Dom.  Rel.  357,  8.  He  admits 
that  the  English  cases  deny  the  master's  liability  where  the 
servant's  act  is  wilful;  but  questions  the  soundness  of  the 
distinction,  if  the  wilful  act  be  done  in  the  immediate  per- 
formance of  his  master's  business;  in  which  I  understand 
the  learned  judge  at  the  circuit  to  have  followed  him  in  the 
case  at  bar.  The  answer  is  that  the  law  holds  such 
wilful  act  a  departure  from  the  master's  business.  Judge 
Reeve  remarks  that  one  of  two  innocent  persons  must 
suffer,  and  that  should  be  the  man  who  put  it  in  the  power 
of  the  servant  to  do  the  injury;  and  the  reason  is  as  strong 
that  the  master  should  run  the  risk  of  his  servant's  unruly 
passions,  as  his  want  of  care.  Clearly  the  argument  proves 
too  much.  It  would  make  the  master  accountable  for 
everv  niischievous  act  of  the  servant,  which  he  is  enabled  to 
commit  in  consequence  of  the  general  relation;  for  aught  I 
see,  including  the  credit  which  the  servant  may  obtain  with 
his  merchant.  The  learned  writer  puts  a  distinction  involv- 
ing the  very  question  we  are  considering.  A  servant 
driving  a  wagon,  leaves  it  and  commits  an  assault  and 
battery;  for  that  he  admits  the  master  is  not  liable;  other- 
wise, if  he  should  drive  it  violently  over  a  man  with  intent 
to  injure  him.  "In  the  first  place,  (he  says,)  the  servant 
had  abandoned  his  master's  business ;  in  the  latter,  he  was  in 


WRIGHT  V.  WILCOX  71 

the  immediate  pursuit  of  it;  in  the  first,  he  was  not  driving 
his  master's  wagon,  in  the  last  he  was."  Now  the  author- 
ities deny  that  when  the  servant  wilfully  drives  over  the 
man,  he  is  in  his  master's  business.  They  hold  it  a  departure, 
and  a  going  into  the  servant's  own  independent  business. 
It  is  true,  he  is  still  driving  his  master's  wagon,  and  so  he 
would  be  though  he  should  use  it  to  run  away  from  ser- 
vice. It  will  hardly  be  contended,  that  after  he  has  com- 
pleted his  escape,  the  master  would  be  liable  for  his  run- 
ning over  a  man;  and  why?  Because  he  has  taken  up  a 
new  and  distinct  object  of  his  own,  and  is  engaged  in  ex- 
ecuting that ;  and  has  he  not,  to  every  material  purpose, 
done  the  same  whenever  he  commits  a  wilful  injury  to 
another?  In  M' Manns  v.  Crickctt,  the  servant,  while  driv- 
ing a  chariot  on  the  road  as  authorized  by  his  master,  wil- 
fully drove  against  the  plaintifif's  chaise.  Lord  Kenyon 
said  that  the  act  being  wilful,  the  chariot  might  be  con- 
sidered for  that  purpose  in  the  possession  of  the  servant 
as  his  special  property,  and  not  the  master's.  He  said : 
"When  a  servant  quits  sight  of  the  object  for  which  he  is 
employed,  and  without  having  in  view  his  master's  orders, 
pursues  that  which  his  own  malice  suggests,  he  no  longer 
acts  in  pursuance  of  the  authority  given  him."  He  puts 
the  master's  liability  on  the  ground  of  negligence  or  un- 
skil fulness  with  no  purpose  but  the  execution  of  his  orders. 
Judge  Reeve  says  it  is  difficult  to  reconcile  such  a  doctrine 
with  the  cases  which  hold  a  sheriff  liable  for  the  wilful 
misfeasance  of  his  deputy.  But  such  cases  are  clearly,  as 
/  stated  by  Mr.  Hammond,  exceptions  to  the  general  rule 
for  reasons  of  policy.  Hamm.  on  Part,  to  Actions,  ^t^, 
4.  The  master  is  liable  in  case  only ;  but  the  action  against 
the  sheriff  is  trespass,  and  lies  against  him  for  every  act  of 
his  officer  done  colore  officii,  even  the  execution  of  process 
after  the  return  day,  and  the  seizing  of  the  goods  of  a  third 
person.  Id.  Ackzuorth  v.  Kempe,  i  Doug.  40.  Parrot  v. 
Mulford,  2  Esp.  N.  P.  Cas.  585.     So  for  arresting  under 


12     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

color  of  process  without  having  any  in  his  hands.  Smart  V. 
Hutton,  2  New.  &  Mann.  426. 

The  line  where  the  master's  liability  shall  terminate 
must  be  placed  somewhere;  and  the  acquiescence  of  West- 
minster Hall  for  many  years  in  the  rule  we  have  cited  as 
laid  down  by  Lord  Kenyon,  is  an  evidence  of  the  com- 
mon law  not  to  be  resisted,  especially  as  it  will  not  be 
found,  I  imagine,  to  conflict  with  any  general  principle 
of  that  law. 

New  trial  granted. 


ROUNDS  V.  D.  &  L.  R.  R.  CO.  73 


ROUNDS     V.     THE     DELAWARE     AND     LACKA- 
WANNA RAILROAD  COMPANY. 

In  the  Court  of  Appeals  of  New  York,  1876.^ 

64  Neiv  York  Reports,  129. 

Appeal  from  judgment  of  the  General  Term  of  the 
Supreme  Court  in  the  third  judicial  department,  in  favor  of 
plaintiff,  entered  upon  an  order  denying  a  motion  for  a 
new  trial  and  directing  judgment  on  a  verdict.  (Reported 
below,  3  Hun,  329;  5  T.  &  C,  475.) 

This  action  was  brought  to  recover  damages  for  in- 
juries sustained  by  plaintiff  in  consequence  of  being  kicked 
oft"  of  one  of  defendant's  baggage  cars  by  the  baggage- 
man. 

The  transaction  resulting  in  the  injury  occurred  at 
Norwich,  May  3,  1872.  The  defendant  operated  a  broad- 
gauge  railroad  from  Binghamton  to  Norwich  and  a  nar- 
row-gauge road  from  Norwich  to  Utica.  The  passenger 
train  from  Binghamton  on  this  occasion  as  usual  ran  to  the 
depot  at  Norwich  and  transferred  the  passengers  and 
freight  to  the  Utica  train  and  then  backed  south  on  a 
switch,  a  distance  of  about  sixty  rods,  to  the  round-house 
to  make  up  the  new  train  which  was  to  run  back  to  Bing- 
hamton. The  train  consisted  of  the  engine,  an  express  car, 
a  baggage  and  smoking  car,  one  car  divided  into  two  com- 
partments and  one  passenger  car.  The  conductor  of  the 
train  got  off  with  the  passengers  at  the  depot  and  left  it 
in  charge  of  the  baggageman  to  run  back  on  the  switch 
and  make  up  the  new  train.  While  the  train  was  un- 
loading and  transferring  the  passengers  at  the  depot  the 
plaintiff",   a   boy  twelve   years   old.   living  near  the   depot. 


^  The  Reporter's  statement  of   facts  is  somewhat  abbreviated,  and 
his  notes  of  the  arguments  of  counsel  are  omitted. 


74     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

got  on  the  platform  of  the  baggage  and  smoking  car,  at 
the  rear  end,  to  ride  down  to  the  round-house.  A  quan- 
tity of  wood  was  piled  at  one  point  along  near  the  west 
side  of  the  track  for  a  distance  of  over  lOO  feet.  While 
the  train  was  backing  down  the  track,  and  when  it  ar- 
rived at  the  wood  pile,  the  baggageman  in  charge  of  the 
train  discovered  the  plaintiff  on  the  platform  and  ordered 
him  of¥.  According  to  the  plaintiff's  testimony,  he  re- 
plied: "I  can't,  the  wood  is  right  here;  I  want  you  to  help 
me,"  and  thereupon  the  baggageman  kicked  him  off.  He 
fell  against  the  wood  and  rolled  under  the  car,  the  wheel 
of  which  passed  over  and  crushed  his  leg.  A  printed 
notice  was  posted  up  in  the  baggage  car  and  another  one  near 
where  the  plaintiff  was  standing  on  the  platform,  as  fol- 
lows: "No  person  will  be  allowed  to  ride  on  this  baggage 
car  except  the  regular  train  men  employed  thereon.  Con- 
ductor and  baggagemen  must  see  this  order  strictly  en- 
forced." Another  printed  notice  was  contained  in  the 
posted  time  cards  as  follows:  'Train  baggagemen  must 
not  permit  any  person  to  ride  in  the  baggage  car,  except 
the  conductor  and  news  agent  connected  with  the  train. 
Conductor  and  baggageman  will  be  held  alike  account- 
able for  a  rigid  enforcement  of  this  rule." 

The  Court  charged  the  jury,  among  other  things,  that 
the  plaintiff  was  a  trespasser  on  the  car,  but  if  the  baggage- 
man, nevertheless,  in  the  discharge  of  his  duty,  pushed  him 
off  the  train  in  an  improper  manner  and  at  a  dangerous 
place  the  defendant  was  liable;  to  which  the  defendant 
excepted.  The  Court  also  charged  the  jury  that  if  the 
baggageman  pushed  the  boy  off  the  train,  and  in  doing  so 
was  acting  as  the  employee  of  the  defendant  in  good  faith 
in  the  discharge  of  a  duty  he  owed  the  company,  the  de- 
fendant would  be  liable  for  the  careless  and  negligent  dis- 
charge of  his  duty;  but  if  he  was  acting  wilfully  and  malic- 
iously toward  the  plaintiff,  outside  of  and  in  excess  of  his 
duty,  then  the  baggageman  alone  would  be  responsible  in 
law    for   the    consequences;   to   which    the    defendant   ex- 


ROUNDS  V.  D.  Si.  L.  R.  R.  CO.  75 

cepted  and  requested  the  Court  to  modify  the  charge  or  to 
charge  that  defendant  was  not  liable  if  the  baggageman 
acted  wilfully  and  wantonly  without  authority  from  de- 
fendant.    This  the  Court  refused. 

Andrews,  J. :  There  is,  at  this  time,  but  little  conflict  of 
judicial  opinion  in  respect  to  the  general  rule  by  which  the 
liability  of  a  master  for  the  misconduct  of  his  servant,  re- 
sulting in  injur}'  to  third  persons,  is  to  be  tested  and  ascer- 
tained. In  Higgins  v.  The  Watcrvliet  Turnpike  Company 
(46  N.  Y.,  27^)  this  subject  was  considered  by  this  court, 
and  the  rule  was  declared  to  be,  that  the  master  was 
responsible  civiliter  for  the  wrongful  act  of  the  servant 
causing  injury  to  a  third  person,  whether  the  act  was  one 
of  negligence  or  positive  misfeasance,  provided  the  servant 
was  at  the  time  acting  for  the  master,  and  within  the 
scope  of  the  business  intrusted  to  him.  The  master  is 
liable  only  for  the  authorized  acts  of  the  servant,  and  the 
root  of  his  liability  for  the  servant's  acts  is  his  consent, 
express  or  implied,  thereto.  \M'ien  the  master  is  to  be 
considered  as  having  authorized  the  wrongful  act  of  the 
servant,  so  as  to  make  him  liable  for  his  misconduct,  is 
the  point  of  difficulty.  Where  authority  is  conferred  to 
act  for  another,  without  special  limitation,  it  carries  with 
it,  by  implication,  authority  to  do  all  things  necessary  to  its 
execution ;  and  when  it  involves  the  exercise  of  the  discre- 
tion of  the  scrv^ant,  or  the  use  of  force  towards  or  against 
another,  the  use  of  such  discretion  or  force  is  a  part  of  the 
thing  authorized,  and  when  exercised  becomes,  as  to  third 
persons,  the  discretion  and  act  of  the  master,  and  this,  al- 
though the  servant  departed  from  the  private  instructions 
of  the  master,  provided  he  was  engaged  at  the  time  in 
doing  his  master's  business,  and  was  acting  within  the 
general  scope  of  his  employment.  It  is  not  the  test  of 
the  master's  liability  for  the  wrongful  act  of  the  servant, 
from  which  injury  to  a  third  person  has  resulted,  that  he 
expressly  authorized  the  particular  act  and  conduct  which 
occasioned  it.     In  most  cases  where  the  master  has  been 


76     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

held  liable  for  the  negligent  or  tortious  act  of  the  serv^ant, 
the  servant  acted  not  only  without  express  authority  to  do 
the  wrong,  but  in  violation  of  his  duty  to  the  master. 

It  is,  in  general,  sufficient  to  make  the  master  re- 
sponsible that  he  gave  to  the  servant  an  authority,  or  made 
it  his  duty  to  act  in  respect  to  the  business  in  which  he 
was  engaged  when  the  wrong  was  committed,  and  that 
the  act  complained  of  was  done  in  the  course  of  his  em- 
ployment. The  master  in  that  case  \vill  be  deemed  to 
have  consented  to  and  authorized  the  act  of  the  servant,  and 
he  will  not  be  excused  from  liability,  although  the  ser- 
vant abused  his  authority,  or  was  reckless  in  the  perform- 
ance of  his  duty,  or  inflicted  an  unnecessary  injury  in 
executing  his  master's  orders.  The  master  who  puts  the 
servant  in  a  place  of  trust  or  responsibility,  or  commits 
to  him  the  management  of  his  business  or  the  care  of  his 
property,  is  justly  held  responsible  when  the  servant, 
through  lack  of  judgment  or  discretion,  or  from  infirmity 
of  temper,  or  under  the  influence  of  passion  aroused  by 
the  circumstances  and  the  occasion,  goes  beyond  the  strict 
line  of  his  duty  or  authority  and  inflicts  an  unjustifiable 
injury  upon  another.  But  it  is  said  that  the  master  is  not 
responsible  for  the  wilful  act  of  the  servant.  This  is  the 
language  of  some  of  the  cases,  and  it  becomes  necessary  to 
ascertain  its  meaning  when  used  in  defining  the  master's 
responsibility. 

The  case  of  McMamts  v.  Crickctt  (i  East,  io6)  turned 
upon  the  form  of  the  action  and  the  distinction  between 
trespass  and  case,  but  Lord  Kenyon,  in  pronouncing  the 
judgment  of  the  court,  said :  "\\'here  a  servant  quits  sight 
of  the  object  for  which  he  was  employed,  and  without  hav- 
ing in  view  his  master's  orders,  pursues  that  which  his  own 
malice  suggests,  his  master  will  not  be  liable  for  such 
acts."  This  language  was  cited  with  approval  in  JVright  v. 
Wilcox  (19  Wend.,  343),  and  the  master  was  held  not 
to  be  responsible  where  the  servant,  in  driving  his  master's 
wagon  along  the  highway,  wilfully  whipped  up  his  horses 


ROUNDS  z'.  D.  &  L.  R.  R.  CO.  77 

while  the  plaintiff's  son,  a  young  lad,  was  standing  between 
the  front  and  back  wheels,  attempting,  with  the  implied 
permission  of  the  servant,  to  get  into  the  wagon,  in  con- 
sequence of  which  the  boy  was  thrown  down,  run  over 
and  injured.  The  servant  was  cautioned  by  a  bystapder 
that  if  he  did  not  stop  he  would  kill  the  boy.  The  Court, 
in  the  opinion  delivered,  assumed  that  the  evidence  showed 
that  the  servant  whipped  up  the  horses  with  a  wilful  design 
to  throw  the  boy  off.  The  act  of  the  servant  was  im- 
minently dangerous,  and  it  might  reasonably  be  inferred 
from  the  evidence  that  he  designed  the  injury  which  re- 
sulted from  it.  "The  law,"  said  Cowen,  J.,  "holds  such 
a  wilful  act  a  departure  from  the  master's  business."  So 
in  Vanderbilt  v.  The  Richmond  Turnpike  Company  (2 
Comst,  479),  the  master  of  the  defendant's  boat  inten- 
tionally ran  into  the  boat  of  the  plaintiff,  and  the  Court 
held  that  this  was  a  wilful  trespass  of  the  master  for  which 
the  defendant  was  not  liable.  In  Lyons  v.  Martin  (8  Ad.  & 
El.,  512)  it  was  held  that  where  a  servant  merely  author- 
ized to  distrain  cattle  damage-feasant,  drives  cattle  from 
the  highway  into  his  master's  close,  and  there  distrains 
them,  the  master  is  not  liable.  In  Mali  v.  Lord  (39  N.  Y., 
381)  the  act  complained  of  was  an  illegal  imprisonment  of 
the  plaintiff  by  the  servant  of  the  defendant,  and  the  Court 
held  that  the  authority  to  do  the  act  could  not  be  im- 
plied from  the  general  employment  of  the  servant.  The  im- 
prisonment, assuming  that  the  suspicion  upon  which  it  was 
made  was  well  founded,  was  illegal.  The  master  could  not 
lawfully  have  detained  the  defendant  if  he  had  been  present, 
and  the  Court  were  of  the  opinion  that  the  servant  could 
not  be  said  to  be  engaged  in  his  master's  business  when 
he  assumed  to  do  what  his  master  could  not  have  done 
himself.  (See,  also,  Bolinghroke  v.  The  Local  Board,  etc., 
L.  R.,  9  C.  P.,  575.)  It  is  quite  useless  to  attempt  to 
reconcile  all  the  cases.  The  discrepancy  between  them 
arises   not   so  much    from   a   difference   of   opinion   as   to 


7%     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

the  rule  of  law  on  the  subject  as  from  its  application  to  the 
facts  of  a  given  case. 

It  seems  to  be  clear  enough  from  the  cases  in  this 
State  that  the  act  of  the  servant  causing  actionable  injury 
to  a  third  person  does  not  subject  the  master  to  civil  re- 
sponsibility in  all  cases  where  it  appears  that  the  servant 
was  at  the  time  in  the  use  of  his  master's  property,  or  be- 
cause the  act,  in  some  general  sense,  was  done  while  he  was 
doing  his  master's  business,  irrespective  of  the  real  nature 
and  motive  of  the  transaction.  On  the  other  hand,  the  mas- 
ter is  not  exempt  from  responsibility  in  all  cases  on  show- 
ing that  the  servant,  without  express  authority,  designed 
to  do  the  act  or  the  injury  complained  of.  If  he  is 
authorized  to  use  force  against  another  when  necessary 
in  executing  his  master's  orders,  the  master  commits  it 
to  him  to  decide  what  degree  of  force  he  shall  use;  and  if, 
through  misjudgment  or  violence  of  temper,  he  goes  be- 
yond the  necessity  of  the  occasion,  and  gives  a  right  of 
■  action  to  another,  he  cannot,  as  to  third  persons,  be  said 
to  have  been  acting  without  the  line  of  his  duty,  or  to  have 
departed  from  his  master's  business.  If,  however,  the  ser- 
vant, under  guise  and  cover  of  executing  his  master's  ord- 
ers, and  exercising  the  authority  conferred  upon  him,  wil- 
fully and  designedly,  for  the  purpose  of  accomplishing  his 
0W41  independent,  malicious  or  wncked  purposes,  does  an 
injury  to  another,  then  the  master  is  not  liable.  The  rela- 
tion of  master  and  servant,  as  to  that  transaction,  does  not 
exist  between  them.  It  is  a  wilful  and  wanton  wrong  and 
trespass,  for  which  the  master  cannot  be  held  responsible. 
And  when  it  is  said  that  the  master  is  not  responsible  for  the 
wilful  wrong  of  the  servant,  the  language  is  to  be  under- 
stood as  referring  to  an  act  of  positive  and  designed  injury, 
not  done  with  a  view  to  the  master's  service,  or  for  the  pur- 
pose of  executing  his  orders.  In  this  view,  the  judge  at  the 
trial  correctly  refused  to  qualify  his  charge  or  to  charge  that 
it  was  sufficient  to  exempt  the  defendant  from  liability  that 
the  act  of  the  brakeman  in  putting  the  plaintiff  off  the 


ROUNDS  V.  D.  &  L.  R.  R.  CO.  79 

car  was  wilful.  He  had  already  charged  that  if  the  brake- 
man  acted  "wilfully  and  maliciously  towards  the  plaintiff, 
outside  of  and  in  excess  of  his  duty,"  in  putting  him  off 
of  the  car,  the  defendant  was  not  liable.  If  the  counsel 
intended  to  claim  that  the  defendant  was  exempt  from 
responsibility  if  the  brakeman  acted  wilfully,  although 
without  malice,  the  point  was  not  well  taken.  That  the 
brakeman  designed  to  put  the  plaintiff  off  the  car  was  not 
disputed,  and  this  was  consistent  with  the  authority  and 
duty  entrusted  to  him.  But  a  wilful  act  which  will  exempt 
a  master  from  liability  for  the  tort  of  his  servant,  must  be 
done  outside  of  his  duty  and  his  master's  business.  The 
charge  was,  therefore,  strictly  correct,  and  the  exception 
was  not  well  taken. 

Neither  was  the  defendant  entitled  to  have  the  Court 
rule,  as  matter  of  law,  that,  upon  the  circumstances  as 
shown  by  the  evidence  on  the  part  of  the  plaintiff",  the  de- 
fendant was  not  responsible.  It  is  conceded  that  the  re- 
moval of  the  plaintiff  from  the  car  was  within  the  scope 
of  the  authority  conferred  upon  the  baggageman.  The 
plaintiff  had  no  right  to  be  there.  He  was  not  a  passenger 
or  servant,  and  had  no  express  or  implied  permission  to 
be  upon  the  car.  The  brakeman,  in  kicking  the  boy  from 
the  platform,  acted  violently  and  unreasonably,  and  to  do 
this  while  the  car  was  in  motion,  and  when  the  space  be- 
tween it  and  the  wood-pile  was  so  small,  was  dangerous  in 
the  extreme.  But  the  Court  could  not  say  from  the  evi 
dence  that  the  brakeman  was  acting  outside  of  and  without 
regard  to  his  employment,  or  designed  to  do  the  injury 
which  resulted,  or  that  the  act  was  wilful  within  the  rule  we 
have  stated.  If  the  master,  when  suit  for  an  injury  re- 
sulting from  the  tortious  act  of  his  servant  while  ap- 
parently engaged  in  executing  his  orders,  claims  exemp- 
tion upon  the  ground  that  the  servant  was  in  fact,  pursuing 
his  own  purposes,  without  reference  to  his  master's  busi- 
ness, and  was  acting  maliciously  and  wilfully,  it  must,  or- 
dinarily, be  left  to  the  jury  to  determine  this  issue  upon  a 


80     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

consideration  of  all  the  facts  and  circumstances  proved. 
(See  Jackson  v.  The  Second  Ave.  R.  R.  Co.,  47  N.  Y.,  274.) 
There  may  be  cases  where  this  rule  does  not  apply,  and 
where  the  Court  would  be  justified  in  taking  the  case  from 
the  jury;  but  where  different  inferences  may  be  drawn  from 
the  facts  proved,  and  when,  in  one  view,  they  ma}^  be  con- 
sistent with  the  liability  of  the  master,  the  case  must  be 
left  to  the  jury.  The  fact  that  the  plaintiff  was  a  trespasser 
on  the  cars  is  not  a  defence.  The  lad  did  not  forfeit  his 
life,  or  subject  himself  to  the  loss  of  his  limbs,  because  he 
was  wrongfully  on  the  car.  The  defendant  owed  him  no 
duty  of  care  by  reason  of  any  special  relation  assumed  or 
existing  between  the  company  and  him,  but  he  was  en- 
titled to  be  protected  against  unnecessary  injury  by  the  de- 
fendant or  its  servants  in  exercising  the  right  of  removing 
him,  and  especially  from  the  unnecessary  and  unjustifiable 
act  of  the  brakeman  by  which  his  life  was  put  in  peril, 
and  which  resulted  in  his  losing  his  limb.  {Sanford  v. 
Eighth  Are.  R.  R.  Co.,  23  N.  Y.,  343 ;  Lovett  v.  Salem,  etc., 
R.  R.  Co.,  9  Allen,  557;  Holmes  v.  Wakefield,  12  id.,  580.) 

No  error  of  law  was  committed  on  the  trial,  and  the 
judgment  of  the  General  Term  should  be  affirmed,  with 
costs. 

All  concur. 

Judgment  affirmed.^ 


==  Hoffman  v.  The  New  York  Central  R.  R.  Co.,  87  N.  Y.  25,  1881. 
(It  is  contrary  to  the  Statute  law  of  the  state  to  put  off  a  trespasser 
from  a  moving  train.  B  was  a  brakeman  on  a  passenger  train  of  a 
railroad  company.  C,  a  small  boy  of  eight,  was  stealing  a  ride  on  the 
platform  of  the  car.  B  kicked  C  off  the  train  when  it  was  in  motion, 
and  C  was  injured.  C  sued  the  company  and  recovered  judgment. 
Affirmed  on  the  ground  that  from  his  position  B  might  be  presumed  to 
have  the  power  to  remove  passengers,  and  that  his  act,  though  wilful 
and  unlawful,  was  within  the  scope  of  his  employment.) 

Illinois  Central  R.  R.  Co.  V.  Latham,  72  Miss.  32,  1894.  (The  rules 
of  a  railroad  company  made  it  the  duty  of  a  brakeman  to  report  persons 
refusing  to  pay  their  fare  and  to  act  only  under  the  conductor's  orders 
in  ejecting  those  who  so  refused.  C  was  a  brakeman  in  the  employ  of 
the  company.  B  was  stealing  a  ride  on  a  train.  C  for  his  own  use 
demanded  a  sum  less  than  the  fare,  and  on  B's  refusal  to  pay,  kicked 
him  off  the  train  and  injured  him.     B  brought  an  action  against  the 


ROUNDS  z'.  D.  &  L.  R.  R.  CO.  81 

company.  Held,  that  on  the  facts  the  Court  should  have  given  binding 
instructions  for  the  defendant.) 

Compare  the  following  cases  in  which  the  master  was  held  liable 
for  the  z<.nlful  and  wanton  injury  of  a  third  person  by  the  misuse  by 
the  servant  of  an  instrument  intrusted  to  his  care  by  the  master. 

Toledo,  Wabash  &  Western  R.  R.  Co.  r.  Harmon,  47  111.  298,  1868. 
(A  was  injured  by  the  running  away  of  his  team,  caused  by  the  escape 
of  steam  from  an  engine  belonging  to  the  company.  The  engineer  in 
charge  of  the  locomotive  had  caused  the  steam  to  escape.  In  an  action 
by  A  against  the  company,  the  defendants  asked  the  Court  to  charge 
that  if  the  jury  believed  the  injury  to  have  been  caused  by  the  wilful 
and  malicious  act  of  the  agent  of  the  defendants,  they  must  find  for  the 
defendants.  The  Court  refused  the  instruction.  Verdict  for  the 
plaintiff.  Judgment  affirmed.  Walker,  J. :  "He  was  their  servant,  was 
engaged  in  the  performance  of  the  duty  assigned  to  him,  and  if.  while 
so  engaged,  he  used  the  engine  put  into  his  possession  and  under  his 
control,  to  accomplish  the  wanton  or  wilful  act  complained  of,  why 
should  not  the  company  be  held  liable?"  p.  306.  Accord:  Texas  &  P. 
Ry.  Co.  V.  Scoville,  62  Fed.  730,  1894,  on  identical  facts.) 


82     AGENT'S  POWER  TO  SUBJECT  PRE\XIPAL  TO  LIABILITY 


SECTION  3.— LIABILITY     FOR     NONFEASANCE 
NEGLIGENCE  OF  SERVANTS. 


JOEL  -c'.  MORISON. 
In  the  Court  of  Exchequer,  1834. 

6  Carrington  and  Payne's  Reports,  501. 

The  declaration  stated,  that,  on  the  i8th  of  April, 
1833,  the  plaintiff  was  proceeding  on  foot  across  a  certain 
public  and  common  highway,  and  that  the  defendant  was 
possessed  of  a  cart  and  horse,  which  were  under  the  care, 
government,  and  direction  of  a  servant  of  his,  who  was 
driving  the  same  along  the  said  highway,  and  that  the  de- 
fendant by  his  said  servant  so  carelessly,  negligently,  and 
improperly  drove,  governed,  and  directed  the  said  horse  and 
cart,  that,  by  the  carelessness,  negligence,  and  improper 
conduct  of  the  defendant  by  his  servant,  the  cart  and  horse 
were  driven  against  the  plaintiff,  and  struck  him,  whereby 
he  was  thrown  down  and  the  bone  of  one  of  his  legs  was 
fractured,  and  he  was  ill  in  consequence,  and  prevented 
from  transacting  his  business,  and  obliged  to  incur  a  great 
expense  in  and  about  the  setting  the  said  bone,  &c.,  and  a 
further  great  expense  in  retaining  and  employing  divers 
persons  to  superintend  and  look  after  his  business  for  six 
calendar  months.     Plea — Xot  guilty. 

From  the  evidence  on  the  part  of  the  plaintiff  it  ap- 
peared that  he  was  in  Bishopsgate  street,  when  he  was 
knocked  down  by  a  cart  and  horse  coming  in  the  direction 
from  Shoreditch,  which  were  sworn  to  have  been  driven 
at  the  time  by  a  person  who  was  the  servant  of  the 
defendant,  another  of  his  servants  being  in  the  cart  with 
him.     The  injury  was  a  fracture  of  the  fibula. 


JOEL  z:  MORRISON  83 

On  the  part  of  the  defendant  witnesses  were  cahed, 
who  swore  that  his  cart  was  for  weeks  before  and  after 
the  time  sworn  to  by  the  plaintiff's  witnesses  only  in  the 
habit  of  being  driven  between  Burton  Crescent  Mews 
and  Finchley,  and  did  not  go  into  the  City  at  all. 

Thcsiger,  for  the  plaintiff,  in  reply,  suggested  that 
either  the  defendant's  servants  might  in  coming  from 
Finchley  have  gone  out  of  their  way  for  their  own  pur- 
poses, or  might  have  taken  the  cart  at  a  time  when  it  was 
not  wanted  for  the  purpose  of  business,  and  have  gone  to 
pay  a  visit  to  some  friend.  He  was  observing  that,  under 
these  circumstances,  the  defendant  was  liable  for  the  acts 
of  his  serv^ants. 

Parke,  B. — He  is  not  liable  if,  as  you  suggest,  these 
young  men  took  the  cart  without  leave;  he  is  liable  if  they 
were  going  extra  Z'iai)i  in  going  from  Burton  Crescent 
Alews  to  Finchley;  but  if  they  chose  to  go  of  their  own 
accord  to  see  a  friend,  when  they  were  not  on  their  mas- 
ter's business,  he  is  not  liable. 

His  Lordship  afterwards,  in  summing  up  said — This  is 
an  action  to  recover  damages  for  an  injury  sustained  by  the 
plaintiff,  in  consequence  of  the  negligence  of  the  defend- 
ant's servant.  There  is  no  doubt  that  the  plaintiff  has 
suffered  the  injury,  and  there  is  no  doubt  that  the  driver 
of  the  cart  was  guilty  of  negligence,  and  there  is  no  doubt 
also  that  the  master,  if  that  person  was  driving  the  cart 
on  his  master's  business,  is  responsible.  If  the  servants, 
being  on  their  master's  business,  took  a  detour  to  call  upon 
a  friend,  the  master  will  be  responsible.  H  you  think  the 
servants  lent  the  cart  to  a  person  who  was  driving  without 
the  defendant's  knowledge,  he  will  not  be  responsible.  Or, 
if  you  think  that  the  young  man  who  was  driving  took  the 
cart  surreptitiously,  and  was  not  at  the  time  employed  on 
his  master's  business,  the  defendant  will  not  be  liable.  The 
master  is  only  liable  where  the  servant  is  acting  in  t!:e 
course  of  his  employment.  If  he  was  going  out  of  his  way, 
against  his  master's  implied  commands,  when  driving  on 


84     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

his  master's  business,  he  will  make  his  master  liable ; 
but  if  he  was  going  on  a  frolic  of  his  own,  without  being 
at  all  on  his  master's  business,  the  master  will  not  be  liable. 
As  to  the  damages,  the  master  is  not  guilty  of  any  offence, 
he  is  only  responsible  in  law,  therefore  the  amount  should 
be  reasonable. 

Verdict  for  plaintiff — damages,  30/.^ 


^Compare:  Sleath  z:  Wilson,  9  C.  &  P.  607,  1839.  (B  directed  his 
servant  C  to  drive  to  the  "Red  Lion,"  in  Castle-street,  Leicester-square, 
but  the  servant  improperly  drove  to  Old-street  Road,  four  miles  out  of 
his  way,  to  deliver  a  parcel  of  his  own,  and  negligently  drove  over  A 
in  Old-street  Road.  A  brought  an  action  against  B.  Erskine,  J.,  in 
summing  up,  said  that  the  action  might  be  maintained.  He  left  the 
case  to  the  jury,  who  found  for  the  plaintilf.) 

Stone  V.  Hills,  45  Conn.  44,  1877.  (B  ct  al.  sent  their  servant  D 
with  a  team  to  C  at  Y,  telling  D  to  return  by  a  particular  route.  C  told 
D  to  go  on  with  team  to  X  and  then  return  to  him.  C.  D  did  so,  and 
while  at  X  left  the  horses  unhitched.  The  horses  ran  away  and  injured 
A,  for  which  injury  A  sued  B.    Judgment  for  A  reversed  on  appeal.) 

Quinn  v.  Power,  87  N.  Y.  535,  1882.  (B  directed  the  pilot  of  his, 
B's,  ferry  boat  to  take  the  boat  from  X  to  Y.  The  pilot  agreed,  without 
compensation,  with  a  boatman  on  the  shore  to  put  the  boatman  on  a 
passing  tow.  To  do  this  the  ferry  deviated  from  its  usual  course  and 
while  so  doing  negligently  ran  into  another  boat.  In  the  collision  C 
was  thrown  into  the  river  and  drowned.  An  action  for  damages  for 
C's  death  was  brought  by  A,  his,  C's,  representative.  The  trial  court 
directed  a  verdict  for  B ;  on  appeal  a  new  trial  was  granted,  on  the 
ground  that  the  facts  as  disclosed  made  the  master  responsible  for  the 
negligence  of  the  pilot.  Finch,  J. :  "Even  if  the  motive  [of  the  devia- 
tion] was  some  purpose  of  their  own,  they  were  still  about  their 
usual  employment.  *  *  *  They  were  still  engaged  in  their  master's 
business    of    transporting    freight    and    passengers    across    the    river." 

P-  539) 

Ritchie  T'.  Waller,  6;^  Conn.  155,  1893.  (B  directed  his  servant  C  to 
drive  to  X  and  procure  a  load  of  manure  and  return  with  it.  C  drove 
to  X,  procured  the  manure,  and,  instead  of  going  directly  home,  drove 
out  of  his  way  to  stop  at  a  shoemaker's  to  get  his  own  boots  mended. 
C  left  the  team  unhitched  and  unattended  while  he  went  into  the  shoe- 
maker's. The  team  started  and  the  wagon  came  in  contact  with  A's 
wagon,  injuring  A.  A  brought  an  action  against  B,  which  was  tried 
without  a  jury.  Judgment  for  A  affirmed.  Torrance,  J. :  "In  cases 
where  the  deviation  is  slight  and  not  unusual,  the  court  may,  and  often 
will,  as  matter  of  law,  determine  that  the  servant  was  still  executing 
his  master's  business.  So  to,  where  the  deviation  is  very  marked  and 
unusual,  the  court  in  like  manner  may  determine  that  the  servant  was 
not  on  the  master's  business  at  all,  but  on  his  own.  Cases  falling  be- 
tween these  extremes  will  be  regarded  as  involving  merely  a  question  of 
fact,  to  be  left  to  the  jury  or  other  trier  of  such  questions,"  pp.  161,  162. 
The  Court  thought  that  the  facts  as  stated  warranted  the  trial  Court 
holding  as  a  question  of  law  that  the  servant,  at  the  time  of  the 
injury,  was  still  executing  his  master's  orders.) 


MITCHELL  V.  CRASSWELLER  85 


MITCHELL  V.  CRASSWELLER. 
In  the  Court  of  Common  Pleas,  1853. 

13  Common  Bench  Reports,  2yj. 

This  was  an  action  by  Iiusband  and  wife,  to  recover  a 
compensation  in  damages  for  injuries  sustained  by  them 
through  the  alleged  negligent  driving  of  the  defendants' 
servant. 

The  cause  was  tried  before  Jervis,  C.  J.,  at  the  sittings 
at  Westminster  after  the  last  term.  The  facts  appeared 
to  be  as  follows : — The  defendants  are  ironmongers  car- 
rying on  an  extensive  business  in  Welbeck  Street,  and 
were  possessed  of  a  horse  and  cart,  with  which  their 
carman  had  on  the  day  mentioned  in  the  declaration  been 
out  to  deliver  goods.  Returning  home  at  a  late  hour  in 
the  evening,  the  carman  drove  up  to  the  shop  door  to  get 
the  keys  of  the  stable,  for  the  purpose  of  putting  up  the 
horse  and  cart.  Having  got  the  keys,  the  carman  was  about 
to  proceed  to  the  stable,  which  was  in  an  adjoining  street, 
and  within  five  hundred  yards  of  the  shop,  when  the  de- 
fendants' foreman,  who  was  unwell,  asked  him  to  drive  him 
a  part  of  his  way  home ;  whereupon  the  carman  went  to  the 
house  for  the  purpose  of  asking  the  permission  of  one  of 
his  employers,  but,  not  finding  either  of  them  at  home,  re- 
turned to  the  foreman,  and,  observing  that  "he  would  chance 
it,"  he  drove  him  as  far  as  Euston  Square.  In  returning 
thence  to  the  stable,  he  accidentally  ran  over  the  plain- 
tiffs. 

Upon  this  state  of  facts,  it  was  contended  on  the  part 
of  the  defendants  that  they  were  not  responsible,  the  acci- 
dent having  happened  whilst  the  carman  was  doing  some- 
thing out  of  the  scope  of  his  duty. 

His  lordship  directed  the  jury  to  find  for  the  plain- 
tiffs, telling  them  at  the  same  time  to  assess  the  damages 


86     AGENTS  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

tliey  considered  the  plaintiffs  entitled  to.  The  jury  accord- 
ingl}'  assessed  the  damages  at  30/.  for  the  injury  done  to 
the  plaintiff,  Thomas  Mitchell,  and  at  10/.  for  the  injury  to 
his  wife.  And  leave  was  reserved  to  the  plaintiffs  to  move 
to  enter  the  verdict  for  them,  if  the  Court  should  think  that 
the  defendants  were  under  the  circumstances  responsible  for 
the  negligence  of  their  carman.^ 

Jervis,  C.  J.  *  *  *  *  *  *  *" 
That  brings  us  to  the  principal  point,  whether,  under 
the  circumstances  disclosed  by  the  evidence,  the  defendants 
are  responsible  for  the  injury  which  the  plaintiffs  have 
sustained.  Each  case  must  depend  upon  its  own  particular 
circumstances.  No  doubt  a  master  may  be  liable  for  injury 
done  by  his  servant's  negligence,  where  the  servant,  being 
about  his  master's  business,  makes  a  small  deviation,  or 
even  where  he  so  exceeds  his  duty  as  to  justify  his  master  in 
at  once  discharging  him.  But,  here  it  cannot  be  denied, 
that,  though  it  was  the  duty  of  the  carman,  on  his  arrival 
with  the  horse  and  cart  at  Welbeck  Street,  immediately  to 
take  them  to  the  stable,  he,  in  violation  of  that  duty,  and 
without  the  sanction  or  knowledge  of  his  employers,  instead 
of  going  to  the  stable,  started  on  a  new  journey,  wholly 
unconnected  with  his  masters'  business, — as  my  Brother 
Parke  expresses  it  in  Joel  v.  Morrison,  "on  a  frolic  of  his 
own."  I  think,  at  all  events,  if  the  master  is  liable  where 
the  servant  has  deviated,  it  must  be  where  the  deviation 
occurs  in  a  journey  on  which  the  servant  has  originally 
started  on  his  master's  business ;  in  other  words,  he  must  be 
in  the  employ  of  his  master  at  the  time  of  committing  the 
grievance.  I  think  that  was  not  the  case  here,  and  therefore 
I  think  the  defendants  are  not  liable  to  this  action.^ 
Rule  discharged. 


^  The  Reporter's  statement  of  facts  is  abbreviated,  and  his  notes  of 
the  arguments  of  counsel  omitted. 

*  Only  so  much  of  the  opinion  as  relates  to  the  question  of  a  mas- 
ter's responsibility  for  the  acts  of  his  servant  is  printed. 

'  The  concurring  opinions  of  Maule,  Cresswell,  and  Williams,  JJ., 
are  omitted. 


RAILWAY  z'.  SHIELDS  87 


RAILWAY  r.  SHIELDS. 
In  the  Supreme  Court  of  Ohio,  1890. 

47  Ohio  State  Reports,  387. 

Error  to  the  Circuit  Court  of  Preble  County.^ 

MiNSHALL,  C.  J. :  The  suit  below  was  an  action  by 
Shields,  a  small  boy,  prosecuted  by  his  next  friend,  against 
The  Pittsburgh,  Cincinnati  &  St.  Louis  Railway  Company 
for  an  injury  caused  by  the  explosion  of  a  torpedo,  wan- 
tonly and  negligently  left  on  its  track  by  one  of  its  servants, 
at  a  point  where  the  children  and  inhabitants  living  along 
the  line  of  the  track,  were  daily  in  the  habit  of  passing  with 
the  knowledge  and  acquiescence  of  the  company.  The  tor- 
pedo, a  dangerous  instrument,  used  by  the  company  as  a 
signal  in  the  operation  of  its  road,  was  picked  up  by  a  com- 
panion of  the  plaintiff,  carried  some  distance  away  and 
caused  to  explode  by  one  of  them  hitting  it.  They  were 
ignorant  of  its  character,  and  at  the  time,  trying  to  satisfy 
their  curiosity  about  it.  The  same  accident  caused  the  in- 
jury for  which  the  original  action  in  Harriuian  v.  Railroad 
Company,  45  Ohio  St.  11,  was  brought,  the  judgment  in 
which  was  reversed  by  this  Court,  for  error  in  sustaining  a 
demurrer  to  the  petition;  and  the  petition  in  the  Harriman 
case  is  substantially  the  same  as  in  this  case. 

After  the  decision  in  the  Harriman  case,  the  defendant 
below  filed  an  answer  in  this  case,  the  second  defence,  of 
which  and  to  which  a  demurrer  was  sustained,  is  as  follows : 

"The  defendant,  for  its  second  defence,  says,  that  it 
carries  upon  its  trains  signal  torpedoes  to  be  used  in  addi- 
tion to  its  regular  signals,  when,  from  fog  or  other  cause, 
the  other  signals  cannot  be  seen  or  relied  upon,  and  that  if 
said  torpedo  was  placed  upon  the  track  as  alleged  in  said 

^  The  Reporter's  notes  of  the  argument  of  counsel  are  omitted. 


88     AGENT'S  POWER  TO  SUBJECT  PRINXIPAL  TO  LIABILITY 

amended  petition,  by  the  employees  of  this  defendant  (a 
fact  which  defendant  wholly  denies),  that  then  said  em- 
ployees placed  the  same  upon  the  track,  at  a  time  and  place 
in  broad  daylight,  when  and  where  there  was  no  necessity 
for  the  use  thereof,  or  of  any  signals  of  any  kind  whatso- 
ever, and  that  said  use  was  without  the  knowledge  or  con- 
sent or  authority,  express  or  implied,  of  the  defendant ; 
was  against  and  contrary  to  its  rules  and  regulations,  as 
said  employees  well  knew,  and  that  said  torpedo  was  so 
used  by  them  outside  and  beyond  the  scope  of  their  employ- 
ment, and  in  no  wise  connected  w^ith  the  control,  manage- 
ment or  operation  of  said  train  of  cars  or  railroad,  and 
was  so  placed  for  the  accomplishment  of  an  independent 
and  wrongful  purpose  of  their  own,  in  this,  to  w4t:  that 
said  employees,  or  one  of  them,  while  said  train  was  taking 
water  at  said  water-tank,  for  the  purpose  of  having  sport 
with  some  lady  passengers  who  were  upon  said  train,  took 
torpedoes  from  the  place  wdiere  kept  on  said  train,  and 
without  the  knowledge  of  said  lady  passengers,  with  whom 
said  employees  were  well  acquainted,  placed  the  same  upon 
the  iron  rails  of  the  track,  in  front  of  the  wheels  of  the 
caboose  in  which  said  lady  passengers  were  riding,  with 
the  intention  to  frighten  them  by  the  sudden  and  unexpected 
explosion  of  said  torpedoes,  which  would  result  with  a 
loud  noise  by  the  passage  of  the  caboose  over  them;  when 
said  train  started  forward,  one  of  said  torpedoes  failed  to 
explode,  and  was  found  as  stated  in  said  amended  peti- 
tion." 

The  sustaining  of  the  demurrer  to  this  defence  is  as- 
signed for  error.  There  is  also  an  exception  to  the  ruling  of 
the  court  in  refusing  to  charge  as  requested.  But  this  rul- 
ing need  not  be  noticed,  as  it  presents  simply  the  same  ques- 
tion as  is  presented  by  the  demurrer  to  the  answer. 

It  would  seem  that  the  question  raised  by  this  defence, 
was  presented  by  the  demurrer  to  the  petition  in  the  Harri- 
man  case,  and  determined  by  the  decision  of  this  court 
therein.     The  fourth  proposition  of  the  syllabus  being,  in 


RAILWAY  z'.  SHIELDS  89 

substance,  that  the  raih-oad  company  was  liable  for  the  neg- 
ligence of  its  servant,  in  placing  and  leaving  the  torpedoes 
on  its  track  at  a  point  where  the  public,  including  children, 
were  permitted  to  pass,  "notwithstanding  such  negligent  acts 
of  the  servant  were  wanton,  reckless  and  needless." 

But  the  counsel  for  the  plaintiff  in  error  think  that  it 
was  not,  and  claim  that  there  is  clear  error  in  the  case  for 
the  reason,  that  the  act  of  the  conductor  in  placing  the  tor- 
pedoes on  the  track,  was  a  mere  caprice  of  his  own,  out- 
side of  his  employment  as  a  servant,  and  contrary  to  the 
rules  of  the  company;  and  that,  therefore,  the  company  is 
not  liable. 

We  do  not  adopt  this  view,  and  shall  show  that  the 
negligence  of  the  conductor  in  this  regard,  though  wanton 
and  contrary  to  the  rules  of  the  company,  occurred  within 
his  employment,  and  is,  therefore,  imputable  to  the  com- 
pany. 

The  law  requires  of  persons  having  in  their  custody 
instruments  of  danger  that  they  should  keep  them  with  the 
utmost  care,  i  Milliard  on  Torts,  3  ed.,  127.  "Sometimes," 
says  Pollock,  "the  term  'consummate  care'  is  used  to  de- 
scribe the  amount  of  caution  required,  but"  he  says,  "it  is 
doubtful  whether  even  this  is  strong  enough.  At  least,  we 
do  not  know  any  English  case  of  this  kind  (not  falling 
under  some  recognized  head  of  exception)  where  unsuc- 
cessful diligence  on  the  defendant's  part  was  held  to  exon- 
erate him."  Pollock  on  Torts,  407.  See  also,  Wharton 
on  Negligence,  Sec.  851. 

And,  it  stands  to  reason,  that  one  charged  with  a  duty 
of  this  kind  cannot  devolve  it  upon  another,  so  as  to  exon- 
erate himself  from  the  consequences  of  injury  being  caused 
to  others  by  the  negligent  manner  in  which  the  duty  in  re- 
gard to  the  custody  of  such  an  instrument  may  be  per- 
formed. Speaking  of  the  absolute  duty  imposed  by  statute 
in  certain  cases,  and,  also,  of  the  duties  required  by  com- 
mon law  "of  common  carriers,  of  owners  of  dangerous  ani- 
mals or  other  things  involving,  by  their  nature  or  position, 


90     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

Special  risk  or  harm  to  neighbors,"  Pollock  observes,  "the 
question  is  not  by  whose  hand  an  unsuccessful  attempt  was 
made,  whether  that  of  the  party  himself,  of  his  servant,  or 
of  an  'independent  contractor,'  but  whether  the  duty  has 
been  adequately  performed  or  not."     Pollock  on  Torts,  64. 

We  in  no  way  limit,  nor  question  the  soundness  of  the 
general  rule,  which  exonerates  the  master  from  liability  for 
the  acts  of  his  servant  done  outside  of  his  employment. 
What  has  been  stated  is  strictly  within  the  reason  and  prin- 
ciple of  the  rule,  which  is,  that  whatever  the  servant  is  en- 
trusted by  the  master  to  do  for  him,  must  be  done  with  the 
same  care  and  prudence  that  would  be  required  of  the  mas- 
ter, acting  in  that  regard  for  himself ;  if  it  be  the  custody  of 
dangerous  instruments,  he  must  observe  the  utmost  care. 

The  inability  of  the  master  to  shift  the  responsibility 
connected  with  the  custody  of  dangerous  instruments,  em- 
ployed in  his  business,  from  himself  to  his  servants  en- 
trusted with  their  use,  is  analogous  to,  and  may  be  said  to 
rest  upon  the  same  principle,  as  that  which  disenables  him 
from  shifting  to  an  independent  contractor,  liability  for 
negligence  in  the  performance  of  work  that  necessarily  tends 
to  expose  others  to  danger,  unless  the  work  is  carefully 
guarded.  It  seems  by  the  great  weight  of  authority  and 
reason  that  this  cannot  be  done.  See  Railroad  Company  v. 
Morcy,  47  Ohio  St.  207,  and  cases  there  cited.  Also,  see, 
Lazvrcncc  v.  Shipman,  39  Conn.  586,  589;  and  Cooley  on 
Torts,  2d  ed.,  644,  646. 

And  the  relation  of  master  and  servant  and  that  of  em- 
ployer and  independent  contractor,  are,  in  this  regard, 
treated  in  one  view  by  Pollock  in  his  work  on  Torts,  as 
will  appear  from  consulting  his  work  at  page  64. 

Now,  in  this  case,  it  must  be  observed,  that  the  duty 
entrusted  by  the  railway  company  to  the  conductor  in  re- 
gard to  these  torpedoes  was,  not  only  to  use  them  as  signals 
with  the  requisite  care  and  caution,  but  to  observe  like  care 
and  caution  in  the  custody  of  them,  when  not  in  use.  The 
servant's  custody  of  them,  when  not  in  use,  was  as  much  a 


RAILWAY  z:  SHIELDS  91 

part  of  his  employment,  as  was  the  use  of  them  as  signals 
when  required.  In  taking  them  from  the  place  where  they 
were  carried  when  not  in  use,  and,  in  mere  caprice,  placing 
them  on  the  track  for  the  purpose  of  frightening  the  ladies, 
he  was  not,  it  is  true,  within  his  employment  as  to  the  use 
of  them;  but,  in  so  doing,  he  violated  the  duties  connected 
with  his  employment  as  the  custodian  of  them,  and  thereby 
made  his  master  liable  for  the  consequences  of  his  neglect, 
in  the  same  manner,  and  to  the  same  extent,  as  if  it  had 
been  done  by  the  company  itself. 

It  is  necessary  in  this,  and  in  all  similar  cases,  to  distin- 
guish between  the  departure  of  a  servant  from  the  employ- 
ment of  the  master,  and  his  departure  from,  or  neglect  of,  a 
duty  connected  with  that  employment.  A  servant  may  de- 
part from  his  employment  without  making  his  master  liable 
for  his  negligence  when  outside  the  employment  of  the  mas- 
ter; and  he  so  departs  whenever  he  goes  beyond  the  scope 
of  his  employment  and  engages  in  affairs  of  his  own.  But 
he  cannot  depart  from  the  duty  entrusted  to  him,  when  that 
duty  regards  the  rights  of  others  in  respect  to  the  employ- 
ment of  dangerous  instruments  by  the  master  in  the  prose- 
cution of  his  business,  without  making  the  master  liable  for 
the  consequences;  for  the  first  step  in  that  direction  is  a 
breach  of  the  duty  entrusted  to  him  by  the  master,  and  his 
negligence  in  this  regard  becomes  at  once  the  negligence  of 
the  master;  otherwise  the  duty  required  of  the  master  in 
respect  to  the  custody  of  such  instruments  employed  in  his 
business,  may  be  shifted  from  the  master  to  the  servant, 
which  cannot  be  done  so  as  to  exonerate  the  master  from  the 
consequences  of  a  neglect  of  the  duty. 

To  better  illustrate  the  ground  of  this  distinction,  we 
may,  for  example,  suppose  a  servant,  with  others  under  his 
control,  employed  with  a  construction  train  repairing  the 
track  of  his  master.  He  may,  for  a  time,  quit  his  employ- 
ment, and,  with  his  men,  go  off  on  affairs  of  his  own. 
Whilst  thus  out  of  the  master's  employment,  he  may  build  a 


92     AGENT'S  POWER  TO  SUBJECT  PRIXXIPAL  TO  LIABILITY 

fire,  which,  through  his  iiegHgence,  may  consume  the  prop- 
erty of  another;  and,  in  the  meantime,  loss  of  Hfe  and  prop- 
erty may  result  from  a  collision  with  the  train  negligently 
left  standing  on  the  track.  Now  whilst,  as  has  been  held, 
the  master  would  not  be  liable  for  the  loss  resulting  from 
the  fire,  because  the  act  was  done  outside  the  servant's  em- 
ployment {Moricr  v.  Raihi^ay  Company,  31  Minn.  351),  yet 
it  is  equally  certain  that,  for  the  loss  occasioned  by  the 
servant's  negligence  in  leaving  the  train  on  the  track,  the 
master  would  be  liable  in  damages;  for  the  plain  reason 
that,  in  abandoning  the  custody  of  the  train,  he  was  guilty 
of  negligence  in  the  employment  of  the  master,  whilst,  in 
building  the  fire,  he  was  not. 

That  what  was  done  by  the  conductor  contravened  the 
purpose  and  instructions  of  the  company,  in  regard  to  the 
use  of  these  torpedoes,  does  not  vary  its  liability  for  the  neg- 
ligence of  the  conductor  in  the  custody  of  them.  In  dis- 
cussing the  master's  liability  for  his  servant,  it  is  said  by 
Professor  Wharton,  "It  is  not  necessary,  in  order  to  make 
the  master  liable,  that  there  should  be  specific  directions  as 
to  the  particular  act.  It  is  enough  if  the  general  relation  of 
master  and  servant,  within  the  range  of  such  act,  exists. 
The  Cjuestion  is  simply  whether  the  wrong  inflicted  was  in- 
cidental to  the  discharge  of  the  servant's  functions.  It  may 
have  been  capricious.  It  may  have  contravened  the  master's 
purposes  or  directions.  But  a  master  who  puts  in  action  a 
train  of  servants,  subject  to  all  the  ordinary  defects  of 
human  nature,  can  no  more  escape  liability  for  injury  caused 
by  such  defects,  than  can  a  master,  who  puts  machinery  in 
motion,  escape  liability,  on  the  ground  of  good  intentions, 
for  injury  accruing  from  defects  of  machinery.  Out  of  the 
servant's  orbit,  when  he  ceases  to  be  a  servant,  his  negli- 
gences are  not  imputable  to  the  master.  But  within  that 
orbit,  they  are  so  imputable,  whatever  the  master  may  have 
meant."  Wharton  on  Negligence,  Sec.  160;  see,  also.  Wood 
on  Master  and  Servant,  Sec.  283;  and  Cooley  on  Torts, 
632  (539*)- 


RAILWAY  '.'.  SHIELDS  93 

The  custody  of  these  torpedoes  was  within  the  servant's 
orbit.  Negligently  leaving  them  on  the  track  was  a  negli- 
gence within  that  orbit,  and  therefore  imputable  to  the  mas- 
ter. If  a  master  has  a  duty  to  perform  and  intrusts  it  to  a 
servant,  who  disregards  it  to  the  injury  of  another,  it  Is  im- 
material, so  far  as  the  liability  of  the  master  is  concerned, 
with  what  motive  or  for  what  purpose,  the  servant  neglects 
the  duty.  This  is  illustrated  by  the  case  of  Wood  v.  Rail- 
road Company,  17  N.  Y.  362,  which  was  an  action  against 
the  company  for  failure  to  carry  the  plaintiff  to  her  destina- 
tion with  reasonable  dispatch.  The  delay  was  caused  by  the 
wilful  act  of  the  conductor  in  wrongfully  detaining  the 
train  at  a  station;  and  which  the  defendant  claimed  exoner- 
ated it  from  liability.  But  the  Court  held  otherwise ;  it  being 
observed,  among  other  things,  in  the  opinion,  that  "The  obli- 
gation to  be  performed  was  that  of  the  master,  and  delay  in 
performance,  from  intentional  violation  of  duty  by  an  agent, 
is  the  negligence  of  the  master." 

We  do  not  see  that  this,  in  any  way,  conflicts  with  the 
decision  in  Railroad  Company  v.  Wetmorc,  19  Ohio  St.  no. 
There  the  plaintiff  got  into  a  quarrel  with  the  baggage- 
master  of  the  company  about  checking  his  baggage;  and, 
under  the  influence  of  anger,  the  latter  struck  the  plaintiff 
with  a  hatchet,  and  it  was  held  that  the  company  was  not 
liable  for  the  injury.  A  hatchet  is  not  an  instrument  of 
danger,  within  the  rule  above  stated — it  includes  only  such 
instruments  as  are  such  within  themselves.  The  danger  of 
a  hatchet  is  in  the  hand  and  spirit  of  the  man  who  may  use 
it.  If,  in  this  case,  the  instrument  left  on  the  track  had  been 
a  hatchet,  the  company  would  not  have  been  liable  to  a  child 
who  might  afterwards  have  picked  it  up  and  been  injured 
by  it.  For  the  company  would  have  been  under  no  such 
duty  as  to  its  custody,  as  it  was  under  in  regard  to  this  dan- 
gerous explosive. 

Judgment  aflivmed.- 


^Compare:  Cousins  z'.  Hannibal  &  St.  Joseph  R.  R.  Co.,  66  Mo.  572, 


94     AGENT'S  POWER  TO  SUBJECT  PRL\'CIPAL  TO  LIABILITY 

1877.  E  and  F  were  servants  of  railroad.  E  had  charge  of  a 
round  house ;  F's  duty  was  to  run  the  engines  from  round  house  to  the 
3ard.  G,  another  employee  of  the  railroad,  was  taken  sick  with  cholera. 
To  obtain  a  doctor  E  and  F,  E  acting  as  engineer  and  F  as  fireman,  ran 
an  engine  down  the  track  outside  the  yard,  and  in  so  doing  negligently 
ran  over  A's  cattle.  Held,  in  an  action  by  A  against  the  company,  that 
the  company  was  not  liable.) 

Salisbury  v.  Erie  R.  R.  Co.,  66  N.  J.  L.  233,  1901.  (A  railroad  com- 
pany placed  a  push  car  in  the  hands  of  a  foreman  of  a  gang  of  men 
for  the  purpose  of  burning  waste  railroad  ties.  The  foreman  loaned 
it  to  C  to  take  away  the  ties  for  his,  C's,  own  use.  C  in  pushing  the 
car  on  the  tracks  of  the  company  negligently  injured  A.  Held,  that 
the  company  was  responsible  for  the  injury  to  A,  on  the  ground  that 
it  was  the  duty  of  the  foreman  to  keep  the  car  under  his  own  super- 
vision while  on  the  track). 


LAUGHER  z'.  POINTER  95 


SECTION  4.— LIABILITY  FOR  NONFEASANCE, 
CONTINUED  — WHAT  CONSTITUTES  THE 
RELATION  OF  MASTER  AND  SERVANT. 


LAUGHER  z'.  POINTER. 
In  the  Court  of  King's  Bench,  1826. 

5  Barnezi'al!  and  CresszixH's  Reports,  547. 

Case.  The  first  count  of  the  declaration  alleged  that 
the  plaintiff  was  possessed  of  a  horse,  and  defendant  was 
possessed  of  a  carriage,  and  two  horses  harnessed  to  and 
drawing  the  same,  and  which  carriage  and  horses  were  under 
the  care,  government,  and  direction  of  a  person,  bcijig  the 
servant  of  the  defendant  in  that  behalf,  who  was  driving 
the  same,  yet  that  the  defendant,  by  his  said  servant,  so 
negligently  and  improperly  drove  and  directed  his  said  car- 
riage and  horses  that  by  the  negligence  and  improper  con- 
duct of  the  defendant,  by  his  said  servant,  the  carriage  ran 
and  struck  against  the  plaintiff's  horse,  &c.  The  second 
count  differed  from  the  first,  only,  by  omitting  to  state  that 
the  defendant  was  possessed  of  the  horses.  The  third  and 
last  count  alleged  that  the  defendant  was  possessed  of  a  car- 
riage drawn  by  two  horses  under  the  care,  government,  and 
direction  of  the  defendant,  yet  that  the  defendant  so  negli- 
gently and  improperly  drove,  governed,  and  directed  the 
carriage  and  horses  that,  by  the  negligence  and  improper 
conduct  of  the  defendant,  the  carriage  ran  and  struck 
against  the  plaintiff's  horse,  S:c.  At  the  trial  before  Ab- 
bott, C.  J.,  at  the  London  sittings  after  ]^Iichaelmas  term, 
1823,  it  appeared  in  evidence  that  the  defendant,  a  gentle- 
man usually  residing  in  the  country,  being  in  town  for  a 
few  days  with  his  own  carriage,  sent  in  the  usual  way  to  a 


96     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

Stable-keeper  for  a  pair  of  horses  for  a  day.  The  stable- 
keeper  accordingly  sent  the  pair  of  horses  and  a  person  to 
drive  the  same.  The  defendant  did  not  select  the  driver, 
nor  had  any  previous  knowledge  of  him.  The  stable- 
keeper  sent  such  person  as  he  chose  for  this  purpose.  The 
driver  had  no  wages  from  his  master,  but  depended  upon 
receiving  a  gratuity  from  the  persons  whose  carriages  he 
drove ;  the  defendant  gave  him  5^.  as  a  gratuity  for  his  day's 
work,  but  the  driver  had  no  power  to  demand  anything. 
The  Lord  Chief  Justice  thought  that  the  evidence  did  not 
support  the  declaration,  and  directed  a  non-suit.  A  rule 
)iisi  for  a  new  trial  was  afterwards  granted,  and  upon  the 
argument,  there  being  a  difference  of  opinion  on  the  bench, 
the  case  was  directed  to  be  argued  before  the  twelve  judges, 
all  of  whom  (except  the  Lord  Chief  Baron)  met  for  that 
purpose  in  Serjeant's  Inn  Hall,  on  the  2d  of  Februarv. 
1825.^ 

LlTTLEDALE^  J.  *  *  *  *  *  *^ 

According  to  the  rules  of  law\  every  man  is  answer- 
able for  injuries  occasioned  by  his  own  personal  negligence; 
and  he  is  also  answerable  for  acts  done  by  the  negligence 
of  those  whom  the  law  denominates  his  servants,  because 
such  servants  represent  the  master  himself,  and  their  acts 
stand  upon  the  same  footing  as  his  own.  And  in  the  pres- 
ent case  the  question  is,  whether  the  coachman,  by  whose 
negligence  the  injury  was  occasioned,  is  to  be  considered  a 
servant  of  the  defendant. 

For  the  acts  of  a  man's  own  domestic  servants  there 
is  no  doubt  but  the  law  makes  him  responsible,  and  if  this 
accident  had  been  occasioned  by  a  coachman  who  consti- 
tuted a  part  of  the  defendant's  own  family,  there  would 
be  no  doubt  of  the  defendant's  liability;  and  the  reason  is, 
that  he  is  hired  by  the  master  either  personally  or  by  those 
who  are  entrusted  by  the  master  with  the  hiring  of  servants. 


^  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 
*His  restatement  of  the  facts  of  the  case  is  omitted. 


LAUGHER  V.  POIXTER  97 

and  he  is  therefore  selected  by  the  master  to  do  the  business 
required  of  him. 

This  rule  applies  not  only  to  domestic  servants  who 
may  have  the  care  of  carriages,  horses,  and  other  things 
in  the  employ  of  the  family,  but  extends  to  other  servants 
whom  the  master  or  owner  selects  and  appoints  to  do  any 
work  or  superintend  any  business,  although  such  servants 
be  not  in  the  immediate  employ  or  under  the  superintend- 
ence of  the  master.  As,  for  instance,  if  a  man  is  the  owner 
of  a  ship,  he  himself  appoints  the  master,  and  he  desires 
the  master  to  appoint  and  select  the  crew;  the' crew  thus 
become  appointed  by  the  owner,  and  are  his  servants 
for  the  management  and  government  of  the  ship,  and  if 
any  damage  happens  through  their  default,  it  is  the  same 
as  if  it  happened  through  the  immediate  default  of  the 
owner  himself.  So  the  same  principle  prevails  if  the  owner 
of  a  farm  has  it  in  his  own  hands,  and  he  does  not  per- 
sonally interfere  in  the  management,  but  appoints  a 
bailiff  or  hind  who  hires  other  persons  under  him, 
all  of  them  being  paid  out  of  the  funds  of  the  owner, 
and  selected  by  himself  or  by  a  person  specially  de- 
puted by  him,  if  any  damage  happen  through  their  de- 
fault the  owner  is  answerable,  because  their  neglect  or 
default  is  his,  as  they  are  appointed  by  and  through 
him.  So  in  the  case  of  a  mine,  the  owner  employs  a 
steward  or  manager  to  superintend  the  working  of  the 
mine,  and  to  hire  under  workmen,  and  he  pays  them  on 
behalf  of  the  owner.  These  under  workmen  then  be- 
come the  immediate  servants  of  the  owner,  and  the 
owner  is  answerable  for  their  default  in  doing  any  acts 
on  account  of  their  employer.  This,  however,  is  not 
the  case  of  a  man  employing  his  own  immediate  servants, 
either  domestic  servants,  or  others,  engaged  by  him  to  con- 
duct any  business,  or  employment,  or  occupation  carried  on 
by  him.  For  the  jobman  was  a  person  carrying  on  a  dis- 
tinct employment  of  his  own,  in  which  he  furnished  men 
and  let  out  horses  to  hire  to  all  such  persons  as  chose  to 


98     AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

employ  him.     This  coachman  was  not  hired  to  the  defend- 
ant;  he  had  no  power  to  dismiss  him.      He  paid  him  no 
wages.     The  man  was  only  to  drive  the  horses  of  the  job- 
man.     It  is  true  the  master  paid  him  no  wages,  and  the 
whole  which  he  got  was  from  the  person  who  hired  the 
horses,  but  that  was  only  a  gratuity.     It  is  the  case  with 
servants  at  inns  and  hotels.     Where  there  is  a  great  deal  of 
business  they  frequently  receive  no  wages  from  the  owner 
of  the  inn  or  hotel,  and  trust  entirely  to  what  they  receive 
from  the  persons  who  resort  to  the  inn  or  hotel,  and  yet 
they  are  not  the  less  the  servants  of  the  innkeeper ;  they  are 
not  servants  upon  wages,  but  servants  upon  expectation  of 
gratuities.     And,  therefore,  if  the  defendant  is  in  this  case 
to  be  answerable  for  the  acts  of  the  driver  provided  by  the 
jobman,  it  must  be  upon  this  principle,  that  if  a  man  either 
for  his  benefit  or  pleasure  employs  an  agent  to  conduct  any 
business,  such  agent  is  to  be  looked  upon  in  the  same  light 
as  if  he  was  the  immediate  servant  of  the  employer,  and 
that  the  owner  of  the  property  by  employing  such  an  agent 
to  transact  his  business,  confides  to  him  the  choice  of  die 
under  workmen,  and  then  the  principle  must  go  on  to  this, 
that  such  agent  and  under  workmen  are  to  be  considered  in 
the  same  light  as  the  foreman  or  manager  of  a  person  in 
conducting  his  business,  and  as  the  workmen  selected  by 
such   foreman  or  manager;  and  that  it  makes  no   differ- 
ence to  persons  who  receive  an  injury  in  what  light  the 
offending    party  stands    to  the    principal,   whether    as  an 
under    workman    employed    by    an    agent,    or    an    under 
workman    employed    by    the    foreman    of    the    principal. 
And  that  the  only  thing  to  be  looked  to   is,  whether  in 
the  end  the  principal  pays  for  the  employment  in  the  course 
of  which  the  injury  is  occasioned. 

But  I  think  that,  upon  principle,  this  rule  cannot  be 
carried  so  far.  In  Bush  v.  Stcinnian  [i  Bos.  &  Pul.  407], 
indeed,  Mr.  Justice  Heath  expresses  it  as  his  opinion,  that 
if  a  person  hires  a  coach  upon  a  job,  and  a  job  coachman 
is  sent  with  it  and  does  any  injury,  the  hirer  of  the  carriage 


LAUGHER  V.  POINTER  99 

is  answerable.  That  is  certainly  entitled  to  great  weight, 
as.  being  the  opinion  of  a  very  able  judge.  It  was,  how- 
ever, only  an  obiter  dictum,  and  in  a  case  where,  like  the 
present,  there  is  a  difference  of  opinion  amongst  the  judges, 
the  question  must,  if  possible,  be  determined  upon  princi- 
ple and  decided  cases.  If  a  man  charters  a  ship  for  a  voy- 
age or  for  time,  and  the  master  and  mariners  are  appointed 
by  the  owner,  this  ship  is  employed  for  the  benefit  and  for 
transacting  the  business  of  the  charterer,  just  the  same  as 
if  he  had  a  ship  of  his  own  employed  in  the  same  service, 
and  it  might  be  said  that  he  deputes  to  the  owner  the  selec- 
tion of  the  master  and  mariners ;  but  in  such  a  case  the  law 
has  never  considered  the  charterer  liable  to  third  persons 
for  the  negligence  of  the  master  and  mariners.  In  Fletcher 
V.  Braddick  [2  N.  R.  182],  the  owners  had  chartered  the 
vessel  to  the  commissioners  of  the  navy,  who  were  to 
put  an  officer  on  board,  under  whose  direction  the  master 
was  to  act,  and  though  there  was  a  king's  pilot  on  board, 
yet  the  owners  were  nevertheless  held  liable  for  running 
down  the  plaintiff's  ship.  In  Nicholson  \.  Mounsey  [15 
East,  384],  a  captain  of  a  man-of-war  was  held  not  liafele 
for  the  default  of  the  lieutenant  whose  watch  it  was  when 
an  injury  was  committed.  Suppose  a  man  has  a  ship  or  a 
carriage  or  other  thing  to  repair,  and  he,  instead  of  having 
the  repairs  done  on  his  own  premises  and  by  his  own  serv- 
ants, sends  it  out  to  be  repaired  by  a  person  who  exercises 
the  public  employment  under  which  it  would  be  repaired, 
and  any  damage  happens  in  the  course  of  the  repair  by  the 
negligence  of  the  persons  employed ;  these  are  employed  by 
a  person  who  may  be  considered  the  agent  of  the  principal, 
and  yet  the  law  would  not  hold  the  principal  liable.  If  a 
man  hires  a  carriage  and  horses  to  travel  from  stage  to 
stage,  the  carriage  and  horses  are  employed  for  the  benefit 
or  pleasure  of  the  traveller,  instead  of  using  his  own.  which 
he  may  not  do  either  from  inability  to  keep  horses  or  a  de- 
sire of  expedition,  and  yet  the  law  has  never  considered 
the  traveller  liable.      There   is   no   difference   in   principle 


100   AGENTS  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

between  a  man's  travelling  by  the  stage  or  travelling  by 
the  day.  In  one  case  and  the  other  the  traveller  is  using 
the  carriage  and  horses  for  his  benefit;  he  pays  so  much 
by  the  day  instead  of  so  much  by  the  mile;  he  pays  the 
coachman  a  gratuity  in  one  case,  and  the  postilion  in  the 
other  case,  and  yet  the  traveller  has  never  been  held  liable. 
As  to  this  latter  point,  there  are  some  decisions  in  point. 
Samnicll  v.  Wright  [5  Esp.  263],  where  the  horses  were 
hired  to  go  to  Windsor,  and  the  owner  of  the  horses  was 
held  liable,  because  they  were  under  the  care  and  direction 
of  his  servants.  The  carriage  belonged  to  the  traveller, 
who  was  the  JMarchioness  of  Bath.  The  case  of  Dcaii  v. 
Branthwaite  [5  Esp.  35],  arose  on  a  dispute  between  the 
owner  of  the  carriage  and  the  owner  of  the  horses,  which 
were  hired  to  go  to  Epsom.  Lord  Ellenborough  says,  a 
person  who  hires  horses  under  such  circumstances  has  not 
the  entire  management  and  power  over  them,  but  that  they 
continue  under  the  controul  and  power  of  the  stable-keeper's 
servants  who  were  entrusted  with  the  driving;  and  that  he 
would  be  answerable  for  any  accident  occasioned  by  the 
po^t  boy's  misconduct  on  the  road,  and  then  he  mentions 
a  case  which  had  occurred  of  that  kind.  In  this  case,  also, 
the  party  travelling  had  his  own  carriage.  The  same  rule 
would  apply  to  a  hackney  coach;  a  man,  instead  of  hiring 
his  own  carriage  and  servants,  employs  a  hackneyman  to 
drive  him;  there  it  is  for  the  profit  or  convenience  of  the 
person  riding  in  the  coach,  and  yet  the  person  so  riding 
is  not  liable. 

The  cases  referred  to  before  Lord  Ellenborough  only 
shew,  indeed,  the  owner  of  the  horses  to  be  liable,  but 
it  may  be  said  the  traveller  is  liable  also.  I  think  not. 
The  coachman  or  postilion  cannot  be  the  servant  of  both. 
He  is  the  servant  of  one  or  the  other,  but  not  the  servant 
of  one  and  the  other;  the  law  does  not  recognize  a  several 
liability  in  two  principals  who  are  unconnected.  If  they  are 
jointly  liable  you  may  sue  either,  but  you  cannot  have  two 
separately  liable ;  you  must  bring  your  action  either  against 


LAUGHER  v.  POINTER  101 

the  principal,  or  the  person  who  commits  the  injury,  Stone 
V.  Cartivright  [6  T.  R.  411].  There  it  was  held  that  an 
action  for  an  injury  sustained  through  the  improper  work- 
ing of  a  mine,  must  be  brought  against  the  owner  of  the 
mine,  or  against  the  workmen  who  did  the  injury,  but  that 
it  could  not  be  brought  against  an  agent  who  hired  the 
workmen.  The  allowing  two  principals  to  be  severally  lia- 
ble would  tend  to  a  multiplicity  of  actions,  because  if  the 
traveller  was  liable,  he  might  have  an  action  against  the 
stable-keeper  for  supplying  improper  drivers  and  horses, 
and  then  the  stable-keeper  might  have  an  action  against  his 
own  drivers.  If,  indeed,  several  persons  are  concerned 
in  a  trespass,  or  other  tortious  act,  they  are  liable  jointly 
or  severally,  at  the  election  of  the  party  injured,  but  the 
several  liability  arises  from  the  joint  liability,  and  from  the 
rule  of  law  that  a  party  injured  need  not  sue  all  who  are 
guilty  of  the  wrongful  act ;  but  what  I  say  is,  that  two  per- 
sons cannot  be  made  separately  liable  at  the  election  of  the 
party  suing,  unless  in  cases  where  they  would  be  jointly 
liable :  and  there  cannot  be  any  ground  for  saying  that  the 
hirer  of  the  horses  and  the  jobman  would  be  jointly  liable. 
There  are,  however,  cases  which  have  been  determined  upon 
principles  not  altogether  consonant  to  what  I  have 
before  considered  are  those  upon  which  the  liabilities  of 
parties  should  be  determined,  where  persons  have  been  held 
liable  for  the  negligence  of  individuals  who  were  not  their 
owai  immediate  servants,  but  the  servants  of  agents  w4iom 
they  had  employed  to  do  their  work.  In^  Bush  v.  Sfcinman 
[i  Bos.  &  Pul.  404],  the  owner  of  a  house  had  employed  a 
surveyor  to  do  some  work  upon  it :  there  were  several  sub- 
contracts, and  one  of  the  workmen  of  the  person  last  em- 
ployed put  some  lime  on  the  road,  in  consequence  of  which 
the  carriage  of  the  plaintiff  was  overturned ;  and  it  was  held 
that  the  owmer  of  the  house  was  liable,  though  the  person 
who  occasioned  the  injury  was  not  his  own  immediate 
servant.  So  in  Sly  v.  Edglcy  [6  Esp.  6],  a  person  had 
employed  a  bricklayer  to  make  a  sewer,  who  left  it  open; 


102   AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

in  consequence  of  which  the  plaintiff  fell  in,  and  broke  his 
leg.  The  person  who  employed  the  bricklayer  was  held 
liable,  upon  the  principle  of  respondeat  superior,  that  he 
had  employed  the  bricklayer,  and  was  answerable  for  what 
he  had  done.  These  cases  appear  to  establish  that  in  these 
particular  instances  the  owner  of  the  property  was  held 
liable,  though  the  injury  were  occasioned  by  the  negligence 
of  contractors  or  their  servants,  and  not  by  the  immediate 
servants  of  the  owner. 

But  supposing  these  cases  to  be  rightly  decided,  there 
is  this  material  distinction,  that  there  the  injury  was  done 
upon  or  near  and  in  respect  of  the  property  of  the  defend- 
ants, of  which  they  were  in  possession  at  the  time.  And 
the  rule  of  law  may  be  that  in  all  cases  where  a  man  is  in 
possession  of  fixed  property  he  must  take  care  that  his 
property  is  so  used  and  managed  that  other  persons  are  not 
injured,  and  that,  whether  his  property  be  managed  by  his 
own  immediate  servants  or  by  contractors  or  their  serv- 
ants. The  injuries  done  upon  land  or  buildings  are  in  the 
nature  of  nuisances,  for  which  the  occupier  ought  to  be 
chargeable  when  occasioned  by  any  acts  of  persons  whom 
he  brings  upon  the  premises.  The  use  of  the  premises  is 
confined  by  the  law  to  himself,  and  he  should  take  care  not 
to  bring  persons  there  who  do  any  mischief  to  others.  But 
as  to  Bush  V.  Stcinman  [i  Bos.  &  Pul.  404],  there  are  some 
observations  to  be  made.  Lord  Chief  Justice  Eyre,  in  the 
first  place  at  nisi  prius,  was  of  opinion  the  action  was  not 
maintainable ;  and  when  the  case  came  before  the  Court,  he 
says  in  the  beginning  of  his  judgment,  "that  he  finds  great 
difficulty  in  stating  with  accuracy  the  grounds  on  which 
it  is  to  be  supported.  The  relation  of  master  and  servant 
as  commonly  exemplified  in  actions  brought  against  the 
master  is  not  sufficient ;  and  the  general  proposition  that  a 
person  shall  be  answerable  for  any  injury  which  arises  in 
carrying  into  execution  that  which  he  has  employed  another 
to  do  seems  to  be  too  large."  And  in  the  conclusion  he  also 
says,  that  he  still  feels  difficulty  in  stating  the  precise  prin- 


LAUGHER  z:  POINTER  103 

ciple  on  which  the  action  is  founded.  This  case,  therefore, 
does  not  rest  upon  the  same  basis  as  it  would  if  no  such 
doubt  had  been  expressed.  The  case  is  mainly  grounded 
upon  that  of  Littledalc  v.  Lord  Lonsdale;  but  in  that  case 
the  defendant  had  a  foreman  or  steward  paid  by  him,  and 
he  engaged  all  the  under  workmen,  who  were  paid  out  of 
the  funds  of  the  defendant.  All  the  machinery  and  utensils 
belonged  to  the  defendant,  and  all  the  persons  employed 
were  his  own  immediate  servants,  just  as  much  as  his  do- 
mestic servants  engaged  and  hired  by  his  house  steward. 
There  is  the  case  of  Leslie  v.  Pounds  [4  Taunt.  649],  which 
has  some  resemblance  to  the  last  cases.  Lord  Chief  Justice 
Mansfield  says  that  it  is  a  very  singular  case.  The  tenant 
of  a  house  was  bound  to  repair  it.  but  the  landlord  superin- 
tended the  repairs;  and,  on  being  remonstrated  with  by  the 
commissioners  of  pavement  as  to  the  dangerous  state  of  the 
cellar,  had  promised  to  take  care  of  it,  and  had  put  up  some 
temporary  boards  as  a  protection  to  the  public,  but  they 
proved  insufficient;  and  an  accident  having  happened,  he 
was  held  liable.  That  was  decided  on  the  ground  of  the 
defendant's  personal  interference  about  his  own  property. 
It  may  be  said  that  the  defendant  in  the  present  case  was 
owner  of  the  carriage,  and  that  therefore  the  principles  of 
these  latter  cases  apply ;  but,  admitting  these  cases,  the  same 
principle  does  not  apply  to  personal  movable  chattels  as  to 
the    permanent    use    and    enjoyment    of    land    or    houses. 

'  Houses  and  land  come  under  the  fixed  use  and  enjoyment 
of  a  man  for  his  regular  occupation  and  enjoyment  in  life; 

I  the  law  compels  him  to  take  care  that  no  persons  come 
about  his  premises  wdio  occasion  injury  to  others.  The 
use  of  a  personal  chattel  is  merely  a  temporary  thing,  the 
enjoyment  of  w'hich  is,  in  many  cases,  trusted  to  the  care 
and  directions  of  persons  exercising  public  employments, 
and  the  mere  possession  of  that,  where  the  care  and  direc- 
tion of  it  is  entrusted  to  such  persons,  who  exercise  public 
employments,  and  in  virtue  of  that  furnish  and  provide  the 
ineans  of  using  it,  is  not  sufficient  to  render  the  owner  lia- 


104   AGENT'S  POWER  TO  SUBJECT  PRIXCIPAL  TO  LIABILITY 

ble.  Movable  property  is  sent  out  into  the  world  by  the 
owner  to  be  conducted  by  other  persons :  the  common  inter- 
course of  mankind  does  not  make  a  man  or  his  own  servants 
always  accompany  his  own  property ;  he  must  in  many  cases 
confide  the  care  of  it  to  others  who  are  not  his  own  sen^ants, 
but  whose  employment  it  is  to  attend  to  it.  And  in  the  in- 
stances of  various  kinds  of  carriages,  they  are  frequently, 
in  the  common  intercourse  of  the  world,  confided  to  the 
care  of  persons,  who  provide  the  drivers  and  horses,  and 
it  is  not  considered  that  the  drivers  necessarily  belong  to 
the  owner  of  the  carriage.  And  I  think  that  there  cannot 
be  any  difference,  in  point  of  law,  as  to  the  liabilities  of 
these  persons  arising  from  the  mere  ownership  of  the 
carriage,  and  that  the  ownership  of  the  carriage  makes 
him  no  more  responsible  than  it  would  do  if  it  had  been 
sent  to  be  repaired  by  a  coachmaker  who,  in  the  course 
of  repair,  had  occasioned  any  damage  to  other  persons ; 
but  if  the  injury  arises  from  the  driver,  it  is  he,  or  the 
person  who  appoints  him.  that  is  to  be  responsible.  It  may 
be  said  that,  according  to  this  doctrine,  a  person  who  hired 
job  horses  and  a  coachman  for  a  year  would  not  be  answer- 
able for  the  negligence  of  the  coachman:  if  the  coachman 
remain  the  mere  servant  of  the  jobman,  not  otherwise  em- 
ployed in  the  service  of  the  hirer,  I  think  the  hirer  would 
not  be  liable  for  whatever  time  he  hired  the  coachman  and 
horses;  but  where  the  coachman  is  hired  for  a  year,  it  will 
very  often  happen  that  he  is  employed  in  other  services 
besides  the  mere  attention  to  the  coach  and  horses;  and  if, 
by  such  circumstances,  he  becomes  the  servant  of  the  hirer, 
besides  being  the  servant  of  the  jobman,  the  "case  might  then 
admit  of  a  different  consideration.  In  Chilcot  v.  Bromley 
[i2  Ves.  114],  testator  bequeathed  to  all  his  servants  500/. 
each;  and  it  was  held,  that  a  coachman  supplied  by  a  job- 
master, together  with  a  carriage  and  horses  which  were 
hired  by  the  year,  was  not  entitled  to  be  considered  a  serv- 
ant. 

This,  however,  is  not  the  case  of  a  servant  employed 


LAUGHER  V.  POINTER  105 

for  a  year  or  a  month,  and  upon  the  whole  of  the  circum- 
stances of  this  case.  I  am  of  opinion  that  this  defendant  is 
not  hable  for  the  damage  that  has  occurred,  and  that  the 
rule  for  setting  aside  the  non-suit  should  be  discharged. 

There  are  many  cases  where  questions  have  arisen 
upon  the  liabilities  of  postmasters,  of  captains  of  ships  of 
war,  and  of  owners  of  ships  who  have  taken  pilots,  and  of 
factors  who  have  acted  for  their  principals,  and  others,  as 
to  what  degree  of  possession  is  kept  by  the  owner.  These  I 
have  not  thought  it  necessary  to  notice,  because  I  think  the 
sole  question  here  is,  whether  if  a  man  employs  another  to 
do  work  respecting  personal  movable  property,  and  that 
other  furnishes  a  servant,  that  servant  is  to  be  considered  in 
the  same  light  as  a  servant  appointed  by  the  person  him- 
self. 

HOLROYD,  /,******      *3 

It  was  contended  in  the  argument,  not  only  that  the 
defendant  was  not  responsible  for  the  driver,  but  that  the 
plaintiff  could  not  recover  on  this  declaration,  each  count 
of  which  contained  as  a  material  allegation  that  the  act  was 
done  by  the  defendant's  servant,  whereas  the  driver 
could  not  be  considered  as  his  servant.  But  my  mind  has 
come  to  the  conclusion,  that  the  defendant  is  responsible 
for  the  driver's  negligence,  and  responsible  too  upon  this 
declaration,  the  driver  being  to  be  considered,  in  my 
opinion,  for  this  purpose  as.  in  law,  his  servant.  It  appears 
to  me,  that  the  defendant  stands  in  the  same  situation  of 
responsibility  as  if  the  horses  had  been  driven  by  Bryant 
himself,  or  as  if  they  had  been  driven  by  a  person  chosen  by 
the  defendant  himself,  for  the  driving  is  equally  under  the 
authority  and  orders  of  the  defendant,  and  equally  for  his 
profit,  benefit,  or  pleasure,  and  the  driver  is,  I  think,  equally 
the  defendant's  servant  for  that  purpose,  whether  the  driver 
be  Bryant  himself,  the  person  directly  hired  and  employed 
by  the  defendant,  or  be  another  person  selected  and  ap- 


His  restatement  of  the  facts  is  omitted. 


106    AGENT'S  POWER  TO  SUBJECT  PRINCIPALTO  LIABILITY 

pointed  by  the  defendant  himself,  or  a  person  selected 
and  appointed  by  Bryant  under  the  authority  or  per- 
mission of  the  defendant.  The  question  is  not  whether 
Bryant,  as  the  owner  of  the  horses  and  the  immediate 
master  of  the  driver,  might  or  might  not  have  been 
made  responsible  for  the  driver's  negligence,  nor  is  this  the 
case  of  a  letting  for  a  particular  purpose  only,  such  as  going 
to  a  particular  place,  as  in  Dcaii  v.  Branthivaitc  [5  Esp. 
35],  and  Sammcll  v.  Wright  [5  Esp.  263],  where  the  hirer 
was  considered  not  to  have  the  entire  management  and  con- 
trol over  the  things  so  hired ;  from  which  cases  the  present 
is  distinguishable,  because  the  present  hiring  was  for  no 
such  particular  purpose,  but  to  go  with  the  carriage  where 
the  defendant  chose,  and  to  be  under  his  general  authority 
and  orders  in  that  respect  for  a  certain  time.  By  such  a 
letting  for  a  certain  time  the  defendant  became  possessed 
in  law  of  the  horses  so  let  to  him  whilst  he  was  using  them 
under  such  letting.  It  would  be  so  clearly,  if  they  had  not 
been  retained  in  the  custody  of  a  driver  provided  by  Bryant, 
according  to  the  doctrine  of  Lord  Ellenborough  in  Lotan 
V.  Cross  [2  Camp.  464],  where  he  says,  "show  a  letting"  (sc. 
of  the  chaise)  for  a  certain  tirrie  to  Brown,  and  the  pos- 
session would  be  in  him;"  and  in  Holl  v.  Pickard  [3  Camp. 
187],  whereby  the  horses  being  let  to  hire  to  Dr.  Carey  for 
a  certain  term,  he,  and  not  the  owner,  was  deemed  to  be  the 
person  in  possession  of  them,  as  he,  Dr.  Carey,  had  a  right 
to  retain  them  till  that  time  was  expired,  though  in  that 
case  indeed  Dr.  Carey  is  stated  to  have  been  driving  them 
by  his  own  servants  when  the  mischief  was  done.  But  in 
the  present  case,  although  the  horses  were  continued  in  the 
custody  of  a  driver  provided  by  Bryant,  yet  as  the  horses 
and  the  driver  were  to  be  for  the  use  and  subject  to  the 
general  directions  of  the  defendant,  and  as  the  defendant 
had  a  right  to  retain  them  till  the  time  for  which  they  were 
hired  was  expired,  and  as  they  were  at  the  time  the  mis- 
chief was  done  in  the  use  and  under  the  directions  of  the 
defendant,  I  think  that  the  driver  was  for  this  purpose  in 


LAUGHER  V.  POINTER  107 

the  employ,  and  in  law,  the  servant  of  the  defendant,  and 
that  the  defendant  was  in  law  answerable  for  the  driver's 
negligence  in  the  execution  of  the  defendant's  orders  in 
such  employ,  in  whatever  situation  the  driver  might  also 
stand  with  respect  to  Bryant,  with  regard  to  Bryant'^  re- 
sponsibility for  him,  at  the  election  of  the  plaintiff.  A 
person  may  stand  in  the  relation  of  servant  to  two  different 
persons  as  his  masters  in  two  different  respects  with  regard 
to  the  same  thing,  and  this  even  though  the  service  done,  or 
to  be  done,  be  special  and  limited  to  a  single  act,  as  appears 
in  2  Roll's  Abr.  556,  pi,  14;  though  that  indeed  was  a  case 
in  which  the  party  employing  the  officer,  who  was  consid- 
ered as  his  sen-ant,  would  not  be  responsible  for  the  con- 
duct of  the  officer  as  his  servant,  but  that  would  be  so  on 
account  of  the  duties  and  obligations  upon  the  officer,  and 
upon  grounds  not  applicable  to  the  question  of  the  de- 
fendant's responsibility  in  the  present  case.  There  it  is 
said,  "If  a  Serjeant  of  London,  or  bailiff  in  a  county,  take  a 
man  upon  a  capias  in  process  at  my  suit,  and  J.  S.  rescue 
him  out  of  his  possession,  I  may  have  a  general  writ  of 
trespass  against  him,  because  the  serjeant  is  as  well  my  ser- 
vant to  this  purpose  as  the  servant  of  the  king;"  (that  is, 
as  it  is  expressed  in  Hobart  180,  minister  as  well  to  the  per- 
son suing  out  the  process  as  to  the  court)  ;  "and  therefore 
the  taking  out  of  the  possession  of  the  serjeant,  who  is  my 
servant,  is  a  taking  out  of  my  possession.''  Tr.  15  Ja. 
entre  Wheatley  and  Stone,  adjudged  in  a  writ  of  error  at 
Serjeant's  Inn.  So  in  the  present  case,  I  think  the  horses 
were  to  be  considered  in  law  as  in  the  possession  of  the  de- 
fendant, and  the  driver  as  the  defendant's  servant,  for  the 
purpose  for  which  he  was  sent  to  the  defendant;  and  I 
think,  that  a  taking  of  the  horses  or  driver  away  from  the 
defendant's  service  during  the  time  for  which  he  had  hired 
them,  would  have  been  a  taking  them  away  from  him,  for 
which  he  might  have  maintained  an  action  of  trespass,  as 
for  a  taking  them  out  of  his  possession  and  service;  and, 
consequently,  that  he  was  answerable  for  the  driver's  negli- 


108   AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

gence  in  driving  him,  the  defendant,  whilst  under  his,  the 
defendant's,  orders,  and  it  is  to  be  considered,  I  think,  as 
the  defendant's  driving  of  the  carriage  and  horses  by  his 
servant.  That  the  responsibihty  is  not  confined  to  the  im- 
mediate master  of  the  person  who  committed  the  injury, 
and  that  the  action  may  be  brought  against  the  person  from 
whom  the  authority  flows  to  do  the  act,  in  the  neghgent 
execution  of  which  the  injury  has  arisen,  is  estabHshed  by 
the  case  of  Bush  v.  Stcinman  [  i  Bos.  &  Pul.  404],  where 
the  owner  of  a  house  having  contracted  with  a  surveyor  to 
repair  the  house  for  a  stipulated  sum,  and  the  surveyor  hav- 
ing contracted  with  a  carpenter  to  do  it,  who  employed  a 
bricklayer,  who  contracted  for  a  quantity  of  lime  with  a 
lime  burner,  the  owner  of  the  house  was  held  responsible 
for  the  damages  occasioned  by  the  lime  burner's  servants 
improperly  laying  that  lime  in  the  high  road.  The  prin- 
ciples on  which  that  case  was  decided  apply,  I  think,  directly 
to  the  present  case,  and  shew  the  responsibility  of  the 
present  defendant;  and,  indeed,  Heath,  J.,  puts  the  very 
case,  that  where  a  person  hires  a  coach  upon  a  job,  and  a 
job  coachman  is  sent  with  it,  the  person  who  hires  the  coach 
is  liable  for  any  mischief  done  by  the  coachman  while  in 
his  employ,  though  (as  the  Judge  is  there  made  to  say),  he 
is  not  his  servant.  But  under  the  circumstances  of  the 
present  case  the  defendant  was,  I  think,  liable  for  the  negli- 
gence of  the  driver  as  his  servant,  driving  the  defendant 
pursuant  to  his  orders  (the  driver  being,  in  law,  his  ser- 
vant, in  my  opinion,  for  that  purpose  according  to  the  decla- 
ration), and,  consequently,  that  the  non-suit  ought  to  be 
set  aside  and  a  new  trial  granted.* 
Rule  discharged. 


*The  opinion  of  Bailey,  J.,  in  favor  of  the  plaintiff,  and  Abbott, 
C.  J.,  in  favor  of  the  defendant,  are  omitted. 


JOXES  v.  SCULLARD  109 


JONES  r.  SCULLARD. 

In  the  Queen's  Bench  Division  of  the  High  Court  of 
Justice,  1898. 

Lazu  Reports,  2  Queen's  Bench  Division,  565. 

Further  consideration  before  Lord  Russell  of  Killowen 
C.  J.,  after  trial  with  a  jury. 

The  plaintiff  was  a  jeweller  carrying  on  business  at 
368,  Holloway  Road.  On  June  22,  1897,  the  day  of  the 
Queen's  Jubilee,  whilst  the  defendant  was  being  driven  in 
his  brougham  in  the  Holloway  Road,  the  driver  of  the 
brougham  lost  control  of  the  horse,  which  bolted  and 
dashed  through  the  window  of  the  plaintiff's  shop,  doing 
considerable  damage.  The  plaintiff  sued  the  defendant  for 
his  loss,  which  he  claimed  to  have  been  caused  by  the 
negligence  of  the  driver.  The  evidence  showed  that  the 
horse  which  was  driven  in  the  brougham  was  a  hard- 
mouthed  horse  and  a  puller,  and  that  the  driver  ought  to 
have  known  that  fact  by  inspection  of  its  mouth,  which 
showed  signs  of  hardness  caused  by  pulling;  that  the  reins 
ought  consequently  to  have  been  fastened  to  the  bar,  where- 
as they  were  improperly  fastened  to  the  cheek  of  the  bit ; 
that  the  curb  was  not  sufficiently  tightened,  and  that  it  was 
by  reason  of  this  adjustment  of  the  reins  and  curb  that  the 
driver  lost  control  of  the  horse.  It  appeared  that  the  broug- 
ham, the  horse,  the  harness,  and  the  suit  of  livery  which 
the  driver  was  wearing  were  the  property  of  the  defend- 
ant; but  the  driver,  a  man  named  Loveday,  was  a  coach- 
man in  the  employment  of  a  livery-stable  keeper  named 
Walker,  at  whose  stable  the  defendant  kept  the  brougham 
and  horse.  The  defendant  had  kept  his  horses  and  car- 
riage at  livery  at  Walker's  stable  since  January  3,  1897.  He 
first  began  to  be  driven  by  Loveday  on  May  10;  but  from 


no    AGENT'S  POWER  TO  SUBJECT  PRINCIPALTO  LIABILITY 

that  date  down  to  the  time  of  the  accident  Loveday  invari- 
ably drove  for  him.  After  Loveday  had  driven  for  him 
a  short  time,  between  May  24  and  May  31,  the  defend- 
ant snppHed  him  with  the  snit  of  hvery  which  he  was  wear- 
ing at  the  time  of  the  accident.  The  particular  horse 
which  caused  the  accident  had  only  been  recently  pur- 
chased by  the  defendant  in  the  country,  and  was  first 
brought  up  to  London  on  June  14.  between  which  date  and 
June  22  it  was  driven  by  Loveday  at  most  some  three  or 
four  times.  The  defendant,  who  disputed  that  the  horse 
was  hard-mouthed  or  improperly  fitted,  also  contended  that, 
even  if  it  were,  he  was  not  responsible,  on  the  ground  that 
Loveday  was  not  his  servant,  but  was  the  servant  of  Walker, 
the  livery-stable  keeper.  The  Chief  Justice  left  to  the  jury 
the  question  of  negligence  only.  The  jury  returned  a  ver- 
dict for  the  plaintifY.  The  cjuestion  as  to  the  person  who  was 
responsible  for  Loveday's  negligence  was  reserved  for  fur- 
ther consideration,  it  being  agreed  that  the  judge  should 
have  power  to  draw  all  necessary  inferences  of  fact.^ 

Aug.  9.  Lord  Russell  of  Killowen,  C.  J. :  This  is 
a  case  which  has  given  me  considerable  anxiety  as  to  how 
I  ought  to  decide  it.  It  raises  a  point  of  importance,  which 
I  think  it  is  eminently  desirable  should  be  considered  in  the 
Court  of  Appeal. 

The  question  which  arises  for  decision  upon  the  facts 
of  this  case  is  whether  the  fact  that  Loveday  was  undoubt- 
edly in  a  general  sense  the  servant  of  Walker  and  could  not 
be  dismissed  from  Walker's  emploj-ment  by  any  act  of 
the  defendant  is  sufficient  to  relieve  the  defendant  from 
responsibility  for  the  negligence  of  Loveday  while  driving 
him.  It  is  clear  upon  the  authorities  that  it  is  not  at  all 
impossible  for  a  man  to  be  in  the  practical  relation  of  ser- 
vant to  two  different  employers.  It  is  clear  that,  although 
Loveday  was  in  the  general  employment  of  Walker,  he 
may  at  the  time  have  been  in  the  particular  employment  of 


^  The  Reporter's  statement  of  the  facts  of  the  case  is  omitted. 


JONES  V.  SCULLARD  111 

the  defendant,  and  the  servant  of  the  defendant  in  relation 
to  the  particular  matter  of  driving  the  defendant's  carriage. 
The  question  is  whether  he  was  so. 

I  will  now  proceed  to  examine  the  leading  authorities 
upon  this  subject,  because  I  do  not  hesitate  to  say  that,  If  it 
were  not  for  those  authorities,  I  should  not  have  felt  the 
perplexity  which  I  have  felt  as  to  how  the  case  should  be 
decided.  At  the  same  time,  I  should  add  that  no  one  of 
those  cases  is,  in  all  essential  characteristics,  on  all  fours 
with  the  present.  In  no  one  of  those  cases  is  there  the  con- 
junction of  all  the  facts  which  exist  here,  namely,  the  own- 
ership by  the  defendant  of  the  brougham,  the  horse,  and 
the  harness,  the  fact  that  the  livery  was  supplied  to  the 
driver  by  the  defendant,  and  the  fact  that  the  horse  which 
was  being  driven  was  one  to  which  the  driver  had  not  been 
previously  accustomed. 

The  first  of  the  authorities  to  which  I  have  referred  is 
Laugher  v.  Pointer  [5  B.  &  C.  547].  The  point  there  raised 
was  considered  of  such  importance  that  it  was  the  subject  of 
consideration,  not  only  by  the  Court  of  King's  Bench,  but 
also  by  the  whole  body  of  the  common  law  judges. 
The  King's  Bench  were  equally  divided,  and  it  was 
stated  by  Parke,  B.,  when  delivering  the  judgment  of 
the  Court  of  Exchequer  in  Quannan  v.  Burnett  [6  AI. 
&  W.  499,  at  p.  507],  that  the  twelve  judges  also 
differed  in  opinion.  Whether  they  also  were  equally 
divided  or  not  I  have  been  unable  to  ascertain,  although  I 
have  been  at  some  pains  to  do  so.  The  decision  of  the 
twelve  judges  is  unreported,  and  a  search  in  the  Record  Of- 
fice has,  I  understand,  thrown  no  further  light  upon  the 
matter.  The  report  in  Barnewall  and  Cresswell  gives  the 
decision  of  the  King's  Bench  only,  and  the  head-note  to  that 
report  is  as  follows :  "Where  the  owner  of  a  carriage  hired 
of  a  stable-keeper  a  pair  of  horses  to  draw  it  for  a  day, 
and  the  owner  of  the  horses  provided  a  driver,  through 
whose  negligent  driving  an  injury  was  done  to  a  horse  be- 
longing to  a  third  person :  Held,  by  Abbott.  C.  J.  and  Lit- 


112   AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

tledale,  J.,  that  the  owner  of  the  carriage  was  not 
liable  to  be  sued  for  such,  injury,  Bayley  and  Holroyd, 
JJ.  diss."  In  his  judgment  Abbott,  C.  J.  [5  B.  &  C 
at  page  577],  says:  "I  must  own  that  I  cannot  per- 
ceive any  substantial  difference  between  hiring  a  pair  of 
horses  to  draw  my  carriage  about  London  for  a  day, 
and  hiring  them  to  draw  it  for  a  stage  on  the  road  I  am 
travelling,  the  driver  being  in  both  cases  furnished  by  the 
owner  of  the  horses  in  the  usual  way ;  nor  can  I  feel  any 
svibstantial  difference  between  hiring  the  horses  to  draw 
my  own  carriage  on  these  occasions  and  hiring  a  car- 
riage with  them  of  their  owner."  With  that  obser- 
vation I  am  disposed  to  agree.  Later  on  he  says 
[5  B.  &  C.  at  page  580]  :  "I  have  acknowledged 
the  difficulty  of  drawing  a  line  with  reference  to  time 
and  distance;  and  I  think  we  must  look  to  other 
circumstances  in  order  to  ascertain  the  obligation  of  the 
hirer.  Length  of  time  may  in  itself  be  a  circumstance 
deserving  of  attention,  because  it  may  be  evidence  of  the 
subsequent  approbation  and  continuance,  if  not  of  the 
original  choice,  of  the  coachman."  That,  I  think,  is  an 
observation  pregnant  with  good  sense.  It  may  be  that 
case  is  well  decided;  but  in  my  opinion  it  does  not  govern 
the  present. 

The  next  case  to  which  I  wish  to  refer  is  that  of 
Brady  v.  Giles  [i  Mood.  &  Rob.  494].  There  the 
defendant,  who  was  a  carriage-jobber  in  London,  let 
on  hire  to  a  Mr .  M'Kinlay  a  barouche  and  four 
horses  for  a  trip  to  Windsor  and  back.  The  horses 
were  driven  by  two  of  the  defendant's  postilions.  On 
the  journey  back  to  town  the  barouche,  owing,  it  was 
alleged,  to  the  negligence  of  the  postilions,  came  into  col- 
lision with  the  plaintiff's  gig.  A  question  arose  at  nisi 
prius  as  to  whether  the  postilions  were  acting  as  the  servants 
of  the  defendant  or  of  M'Kinlay.  Lord  Abinger,  before 
whom  the  case  was  tried,  left  the  question  to  the  jury,  and 
said  that  "it  had  always  appeared  to  him  that  the  Court 


JONES  z:  SCULLARD  113 

of  King's  Bench  had  pursued  an  erroneous  course  in 
Laugher  v.  Pointer  [5  B.  &  C.  547]  when  they  al- 
lowed the  cpestion  now  raised  to  be  discussed  as  if 
it  were  a  question  of  law  for  the  judge  to  decide.  It 
always  appeared  to  him  that  it  was  quite  impossible 
to  lay  down  any  rule  of  law  on  such  a  point.  No 
satisfactory  line  could  be  drawn  at  which,  as  a  mat- 
ter of  law,  the  general  owner  of  a  carriage,  or  rather 
the  general  employer  of  the  driver,  ceased  to  be  responsible 
and  the  temporary  hirer  became  so.  Each  case  of  this 
class  must  depend  upon  its  own  circumstances."  That  ap- 
pears to  me  to  be  a  sound  view ;  and  it  was  in  consequence 
of  w^hat  was  there  said  that  in  the  present  case  I  thought 
it  right  that,  when  reserving  this  case  for  further  con- 
sideration, I  should  be  empowered  to  draw  all  proper  in- 
ferences from  the  facts. 

The  next  case  is  Ouarmau  v.  Burnett  [6  M.  & 
W.  499].  There  the  defendants,  two  ladies,  who  kept 
a  carriage,  had  for  a  period  of  about  three  years 
been  in  the  habit  of  hiring  for  the  day  or  for  the 
drive  horses  and  a  coachman  from  a  particular  job- 
mistress.  They  had  during  that  time  always  been  driven 
by  the  same  coachman,  to  whom  they  paid  a  small 
gratuity  for  each  drive.  Owing  to  the  negligence  of 
the  coachman  in  leaving  the  horses  unattended  while 
the  carriage  was  standing  at  the  door  of  the  defend- 
ants' house,  the  horses  started  off  and  came  into  collision 
with  the  plaintiff's  chaise.  A  verdict  having  been  found 
for  the  plaintiff,  the  Court  of  Exchequer  set  it  aside,  on  the 
ground  that  there  was  no  evidence  that  the  coachman  was 
acting  as  the  servant  of  the  defendants.  That  case  might 
appear  to  be  an  authority  in  favor  of  the  defendant;  but 
I  would  point  out  that  its  facts  dift'er  from  those  in  the 
present  case  in  two  material  particulars.  In  the  present 
case  the  horse  which  was  being  driven  was  the  property  of 
the  defendant ;  and,  secondly,  not  only  was  it  his  property. 
but  it  was  one  which  he  had  only  recently  purchased,  and 


114   AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

with  which  consequently  the  driver  supphed  by  the  Hvery- 
stable  keeper  had  but  an  imperfect  acquaintance.  Both 
those  matters  are  to  my  mind  material.  The  materiality  of 
the  ownership  of  the  horse  lies  in  this :  so  long  as  the 
hirer  contracts  with  the  livery-stable  keeper  for  the  sup- 
ply of  a  complete  equipage  to  drive  him  by  the  day  or 
hour,  as  the  case  may  be,  and  the  stable  keeper  in  pur- 
suance of  that  contract  supplies  carriage,  horses,  and  the 
man  to  drive  them,  the  hirer  has  no  control  whatever  over 
the  driver,  except  so  far  as  he  can  indicate  the  direction  in 
which  he  wishes  to  be  driven.  He  could  not  order  him 
to  increase  the  speed,  for  the  driver  might  lawfully  refuse 
to  do  so  on  the  ground  that  he  was  acting  under  his  mas- 
ter's orders  in  driving  slowly.  .  But  where  the  hirer  of 
the  coachman  is  himself  the  owner  of  the  horse,  he  is  en- 
abled to  dictate  to  the  driver  as  to  how  fast  he  shall  drive, 
and  the  driver  is  bound  to  take  his  orders  from  him.  The 
driver  is  in  that  case  under  the  control  of  the  hirer  as  to 
the  manner  of  his  driving.  Then  comes  the  further  con- 
sideration that  the  horse  was  one  which  had  only  come 
into  the  possession  of  the  defendant  a  few  days  before 
the  date  of  the  accident,  and  had  been  driven  by  Loveday 
an  insufficient  number  of  times  to  enable  him  to  learn  the 
peculiarities  of  the  horse's  temper  and  the  manner  in 
which,  having  regard  to  that  temper,  the  bit  and  reins 
required  to  be  adjusted.  Further,  although  the  defendant 
could  not  dismiss  Loveday  from  Walker's  employment,  he 
could  if  dissatisfied  with  his  manner  of  driving  refuse  to  be 
driven  by  him.  These  matters,  to  my  mind,  form  elements 
to  be  considered  in  determining  the  relation  of  the  driver 
to  the  defendant. 

The  only  two  other  cases  to  which  I  wish  to 
refer  seem  directly  to  support  the  view  which  I  have 
taken  in  the  present  case.  The  first  of  those  two 
cases  is  Roiirkc  v.  White  Moss  Colliery  Co.  [2  C. 
P.  D.  205].  There  the  defendants,  having  begun  sink- 
ing   a    shaft    in    their    colliery,    for    which    purpose    they 


JONES  z:  SCULLARD  115 

had  fixed  an  engine  near  the  mouth  of  the  shaft, 
agreed  with  W  to  do  the  sinking  and  excavating  at  a  cer- 
tain price  per  yard,  W  to  find  all  labor,  the  defendants  to 
provide  and  place  at  the  disposal  of  W  the  necessary  en- 
gine-power with  an  engineer  to  work  the  engine  (who'was 
employed  and  paid  by  the  defendants),  the  engine  and 
engineer  to  be  under  the  control  of  W.  The  plaintiff,  who 
was  one  of  the  men  employed  and  paid  by  W.  while  work- 
ing at  the  bottom  of  the  shaft  was  injured  by  the  negli- 
gence of  the  engineer.  It  was  held  that,  though  the  en- 
gineer remained  the  general  servant  of  the  defendants,  yet, 
being  under  the  orders  and  control  of  W  at  the  time  of  the 
accident,  he  was  acting  as  the  servant  of  W,  and  not  of 
the  defendants,  who  were,  therefore,  not  liable  for  his 
negligence.  That  case  makes  it  quite  clear  that  a  man  may 
l>e  the  general  servant  of  one  person,  and  yet  at  the  same 
time  be  the  servant  of  another  in  relation  to  a  particular 
matter,  and  it  also  shews  that  the  important  element, 
whereby  to  determine  whether  he  is  the  servant  of  the 
one  person  or  of  the  other  in  relation  to  the  particular 
business  on  which  he  is  engaged,  is  which  of  the  two  per- 
sons had  the  control  of  him  in  the  conduct  of  that  busi- 
ness. 

The  other  case  is  Donovan  v.  Laing,  Sc,  Syn- 
dicate. [1893,  I  O.  B.  629.]  There  the  defendants 
contracted  to  lend  to  a  firm  who  were  engaged  in 
loading  a  ship  at  their  wharf  a  crane  with  a  man 
in  charge  of  it.  The  man  in  charge  of  the  crane 
received  directions  from  the  firm  or  their  servants  as  to 
the  working  of  the  crane,  and  the  defendants  had  no  con- 
trol in  the  matter.  The  plaintiff,  who  was  a  servant  of 
the  wharfingers  and  was  employed  by  them  to  direct  tlie 
working  of  the  crane,  sustained  an  injur}^  through  being 
struck  by  it  by  reason  of  the  negligence  of  the  man  in 
charge,  and  sued  the  defendants  on  the  ground  that  tlie 
nesflieence  was  the  act  of  their  servant.  It  was  held  that 
though  the  man  in  charge  of  the  crane  remained  the  gen- 


116  AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

eral  servant  of  the  defendants,  yet,  as  they  had  parted 
with  the  power  of  controlHng  him  with  regard  to  the  matter 
on  which  he  was  engaged,  they  were  not  hable  for  his  negH- 
gence  while  so  employed.  That  case  is  on  all  fours  with 
Rourkc  V.  White  Moss  Colliery  Co.  [2  C.  P.  D.  205]. 
Now.  apply  the  principle  of  those  cases  to  the  facts  of  the 
case  before  me.  What  control  had  the  livery-stable  keeper 
over  the  driver  while  driving  the  defendant's  horse?  Abso- 
lutely none.  The  whole  control  was  in  the  defendant,  who 
could  have  ordered  the  driver  to  go  fast  or  slow,  or  stop  or 
go  on,  just  as  he  pleased,  or  to  keep  the  horse  without  food, 
or  otherwise  manage  the  horse  as  he  directed.  Bowen,  L.  J., 
in  the  course  of  his  judgment  in  Donovan  v.  Laing,  &c., 
Syndicate  [1893,  i  0.  B.  629],  indeed  says  [1893,  i  O. 
B.  at  p.  634]  :  "The  principal  part  of  the  argument  for  the 
plaintiff  was  founded  on  what  may  be  called  the  carriage 
cases:  Laugher  v.  Pointer  [5  B.  &  C.  547]  and 
Qiiarman  v.  Burnett  [6  M.  &  W.  499]  ;  but  they 
really  have  nothing  to  do  with  the  point  presented  in 
this  appeal.  If  a  man  lets  out  a  carriage  on  hire  to 
another,  he  in  no  sense  places  the  coachman  under 
the  control  of  the  hirer,  except  that  the  latter  may 
indicate  the  destination  to  which  he  wishes  to  be  driven. 
The  coachman  does  not  become  the  servant  of  the  person 
lie  is  driving;  and  if  the  coachman  acts  wrongly,  the 
hirer  can  only  complain  to  the  owner  of  the  carriage."  But 
in  so  distinguishing  the  case  with  which  he  was  dealing 
from  the  carriage  cases,  it  is  clear  that  he  only  intended  to 
include  under  that  latter  term  cases  in  which  the  stable- 
keeper  is  letting  out  a  complete  equipage,  carriage,  horses, 
and  man,  and  did  not  intend  to  include  under  it  such  a 
case  as  the  present. 

The  principle,  then,  to  be  extracted  from  the  cases  is 
that,  if  the  hirer  simply  applies  to  the  livery-stable  keeper 
to  drive  him  between  certain  points  or  for  a  certain  period 
of  time,  and  the  latter  supplies  all  necessary  for  that  pur- 
pose, the  hirer  is  in  no  sense  responsible  for  any  negli- 


JONES  V.  SCULLARD  117 

gence  on  the  part  of  the  driver.  But  it  seems  to  me  to  be 
altogether  a  different  case  where  the  brougham,  the  horse, 
the  harness,  and  the  livery  are  the  property  of  the  person 
hiring  the  services  of  the  driver.  And  in  such  a  case,  especi- 
ally if,  as  here,  the  driver  has  driven  the  hirer  for  a  ^con- 
siderable period  of  time  and  been  approved  by  him,  and 
the  horse  is  one  the  characteristics  or  peculiarities  of  which 
neither  the  livery-stable  keeper  nor  his  driver  have  had  any 
practical  opportunity  of  becoming  acquainted  with,  there 
is,  it  seems  to  me,  evidence  upon  which  a  jury  would  be 
justified  in  coming  to  the  conclusion  that  the  driver  was 
upon  the  occasion  in  question  acting  as  the  servant,  not  of 
the  livery-stable  keeper,  but  of  the  person  who  hired 
him.  I  have  come  to  that  conclusion.  There  must  be 
judgment  for  the  plaintiff. 

Judgment  for  the  plaintiff. 


118   AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 


DEMPSEY  c'.  CHAMBERS. 

In  the   Supreme  Judicial   Court   of   Massachusetts, 

1891. 

154  Massachusetts  Reports,  330.* 

Holmes,  J. :  This  is  an  action  of  tort  to  recover  dam- 
•  ages  for  the  breaking  of  a  plate-glass  window.  The  glass 
was  broken  by  the  negligence  of  one  McCullock,  while 
delivering  some  coal  which  had  been  ordered  of  the  de- 
fendant by  the  plaintiff.  It  is  found  as  a  fact  that  Mc- 
Cullock was  not  the  defendant's  servant  when  he  broke 
the  window,  but  that  the  ''delivery  of  the  coal  by  Mc- 
Cullock was  ratified  by  the  defendant,  and  that  such 
ratification  made  McCullock  in  law  the  agent  and  servant 
of  the  defendant  in  the  delivery  of  the  coal."  On  this  find- 
ing the  Court  ruled  "that  the  defendant,  by  his  ratifica- 
tion of  the  delivery  of  the  coal  by  McCullock  became  re- 
sponsible for  his  negligence  in  the  delivery  of  the  coal." 
The  defendant  excepted  to  this  ruling,  and  to  nothing  else. 
We  must  assume  that  the  finding  was  warranted  by  the 
evidence,  a  majority  of  the  court  being  of  opinion  that  the 
bill  of  exception  does  not  purport  to  set  forth  all  the  evi- 
dence on  which  the  finding  was  made.  Therefore,  the 
only  question  before  us  is  as  to  the  correctness  of  the  rul- 
ing just  stated. 

If  we  were  contriving  a  new  code  to-day,  we  might 
hesitate  to  say  that  a  man  could  make  himself  a  party  to  a 
bare  tort,  in  any  case,  merely  by  assenting  to  it  after  it 
had  been  committed.  But  we  are  not  at  liberty  to  refuse 
to  carry  out  to  its  consequences  any  principle  which  we 
believe  to  have  been  part  of  the  common  law,  simply  be- 
cause the  grounds  of  policy  on  which  it  must  be  justified 


'  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


DEMPSEY  V.  CHAMBERS  119 

seem  to  us  to  be  hard  to  find,  and  probably  to  have  be- 
longed to  a  different  state  of  society. 

It  is  hard  to  explain  why  a  master  is  liable  to  the  ex- 
tent that  he  is  for  the  negligent  acts  of  one  who  at  the 
time  really  is  his  servant,  acting  within  the  general  scope 
of  his  employment.  Probably  master  and  servant  are 
"fained  to  be  all  one  person"  by  a  fiction  which  is  an  echo 
of  the  patria  potcstas  and  of  the  English  frankpledge.  By- 
ington  v.  Simpson,  134  Mass.  169,  170;  Fitz.  Abr.  Corone, 
pi.  428.  Possibly  the  doctrine  of  ratification  is  another  as- 
pect of  the  same  tradition.  The  requirement  that  the 
act  should  be  done  in  the  name  of  the  ratifying  party  looks 
that  way.  Nciu  England  Dredging  Co.  v.  Rockport  Gran- 
ite Co.,  149  Mass.  381,  382;  Fuller  &  Trimwell's  case, 
2  Leon.  215,  216;  Sext.  Dec.  5.  12,  De  Reg.  Jur.,  Reg.  9. 
D.  43.  26.  13.  D.  43.  16.  I,  sec.  14,  gloss.  See  also  cases 
next  cited. 

The  earliest  instances  of  liability  by  way  of  ratification 
in  the  English  law%  so  far  as  we  have  noticed,  were  where 
a  man  retained  property  acquired  through  the  wrongful  act 
of  another.  Y.  B.  30  Ed.  I.  128  (Rolls  ed.)  ;  38  Lib.  Ass. 
22T,,  pi.  g;  S.  C.  38  Ed.  in.  18,  Engettement  de  Garde. 
See  Plowd.  8  ad  fin.,  2y,  31 ;  Bract,  fol.  158  b,  159  a,  171  b; 
12  Ed.  IV.  9,  pi.  23.  But  in  these  cases  the  defendant's 
assent  was  treated  as  relating  back  to  the  original  act,  and 
at  an  early  date  the  doctrine  of  relation  was  carried  so  far 
as  to  hold  that,  where  a  trespass  would  have  been  justified 
,  if  it  had  been  done  by  the  authority  by  which  it  pur- 
ported to  have  been  done,  a  subsequent  ratification  might 
justify  it  also.  Y.  B.  7  Hen.  IV.  34,  pi.  i.  This  decision 
is  qualified  in  Fitz.  Abr.  Bayllye,  pi.  4,  and  doubted  in 
Bro.  Abr.  Trespass,  pi.  86 ;  but  it  has  been  followed  or 
approved  so  continuously,  and  in  so  many  later  cases,  that 
it  would  be  hard  to  deny  that  the  common  law  was  as 
there  stated  by  Chief  Justice  Gascoigne.  Godbolt.  109, 
no,  pi.  129;  5.  C.  2  Leon.  196,  pi.  246;  Hull  v.  Pickers- 
gill,  I  Brod.  &  Bing.  282;  Miiskctt  v.  Drunnnond,  10  B.  & 


120   AGENT'S  POWER  TO  SUBJECT  PRINCIPAL  TO  LIABILITY 

C.  153,  157;  Enroll  v.  Dounan,  2  Exch.  167,  188;  Secre- 
tary of  State  ill  Council  of  India  v.  Kaiiiachee  Boye  Sahaba, 
13  Moore,  P.  C.  22,  86;  Chcctham  v.  Mayor  of  Manches- 
ter, L.  R.  10  C.  P.  249;  Wiggins  v.  United  States,  3  Ct.  of 
CI.  412. 

If  we  assume  that  an  alleged  principal  by  adopting  an 
act  which  was  unlawful  when  done  can  make  it  lawful,  it 
follows  that  he  adopts  it  at  his  peril,  and  is  liable  if  it 
should  turn  out  that  his  previous  command  would  not  have 
justified  the  act.  It  never  has  been  doubted  that  a  man's 
subsequent  agreement  to  a  trespass  done  in  his  name  and 
for  his  benefit  amounts  to  a  command  so  far  as  to  make 
him  answerable.  The  ratihahitio  iiiandato  comparatur  of 
the  Roman  lawyers  and  the  earlier  cases  (D.  46.  3.  12,  sec. 
4;  D.  43.  16.  I,  sec.  14;  Y.  B.  30  Ed.  I.  128)  has  been 
changed  to  the  dogma  aeqiiiparatur  ever  since  the  days  of 
Lord  Coke.  4  Inst.  317.  See  Bro.  Abr.  Trespass,  pi.  113; 
Co.  Lit.  207  a;  Wingate's  Maxims,  124;  Com.  Dig.  Tres- 
pass, C,  I ;  Eastern  Counties  Railway  v.  Broom,  6  Exch. 
314,  326.  327  ;  and  cases  hereafter  cited. 

Doubts  have  been  expressed,  which  we  need  not  con- 
sider, whether  this  doctrine  applied  to  the  case  of  a  bare 
personal  tort.  Adams  v.  Freeman,  9  Johns.  117,  118.  Ander- 
son and  Warberton,  JJ..  in  Bishop  v.  Montague,  Cro.  Eliz. 
824.  If  a  man  assaulted  another  in  the  street  out  of  his 
own  head,  it  would  seem  rather  strong  to  say  that,  if  he 
merely  called  himself  my  servant,  and  I  afterwards  as- 
sented, without  more,  our  mere  words  would  make  me  a 
party  to  the  assault,  although  in  such  cases  the  canon 
law  excommunicated  the  principal  if  the  assault  was  upon 
a  clerk.  Sext.  Dec.  5.  11.  23.  Perhaps  the  application  of 
the  doctrine  would  be  avoided  on  the  grounds  that  the 
facts  did  not  show  an  act  done  for  the  defendant's  benefit. 
Wilson  V.  Barker,  i  Nev.  &  ]Man.  409;  5.  C.  4  B.  &  Ad.  614, 
et  seq.;  Smith  v.  Lozo.  42  ]Mich.  6.  As  in  other  cases  it 
has  been  on  the  ground  that  thev  did  not  amount  to  such 


DEMPSEY  V.  CHAMBERS  121 

a  ratification  as  was  necessary.  Tucker  v.  Jcrris,  75  iMaine, 
184;  Hyde  v.  Cooper,  26  Vt.  552. 

But  the  language  generally  used  by  judges  and  text 
writers,  and  such  decision  as  we  have  been  able  to  find,  is 
broad  enough  to  cover  a  case  like  the  present  when  the  'rati- 
fication is  established.  Perley  v.  Georgetozvn,  7  Gray,  464; 
Bishop  V.  Montague,  Cro.  Eliz.  824;  Sanderson  v.  Baker, 
2  Bl.  832;  5".  C.  3  Wils.  309;  Barker  v.  Braham,  2  Bl.  866, 
868;  5.  C.  3  Wils.  368;  Bodkin  v.  Powell,  Cowper,  476, 
479;  Wilson  V.  Tununan,  6  Man.  &  G.  236,  242;  Lezvis  v. 
Read,  13*  M.  &  \V.  834;  Buron  v.  Denman,  2  Exch.  167, 
188;  Bird  V.  Brozvn,  4  Exch.  786,  799;  Eastern  Counties 
Railway  v.  Broom,  6  Exch.  314.  326,  327;  Roe  v.  Birken- 
head, Lancashire,  &  Cheshire  Junction  Railzvay,  7  Exch. 
^6,  41;  Ancona  v.  Marks,  7  H.  &  N.  686,  695;  Condit 
V.  Baldzvin,  21  N.  Y.  219,  225;  Exuni  v.  Brister,  35  Miss. 
391  ;  Galveston,  Harrisburg,  &  San  Antonio  Railzvay  v. 
Donahoe,  56  Texas,  162;  Murray  v.  Lovejoy,  2  Cliff.  191, 
195  ;  see  Lovejoy  v.  Murray,  3  Wall.  1,9;  Story  on  Agency, 
sees.  455.  456.- 

Exceptions  overruled. 


'  The  Court's  discussion  of  the  question  whether  the  ratification 
was  established  is  omitted.  An  affirmative  conclusion  on  this  question 
was  reached. 


CHAPTER  II. 


LIABILITY  OF  AN  UNDISCLOSED 
PRINCIPAL. 


RAILTOX  V.  HODGSON. 

In  the  Court  of  Common  Pleas,  before  Mansfield,  C. 

J.,  1804. 

4  Taunton's  Reports,  576,  note  a. 

The  facts  were,  that  the  defendant,  Hodgson,  had  for- 
merly been  a  clerk  with  Smith,  Lindsay,  and  Co.,  and  after- 
wards set  up  in  business  for  himself,  and  had  a  counting- 
house  for  himself  at  the  house  of  Smith,  Lindsay,  and  Co., 
which  the  vendors  knew ;  that  he  purchased  goods  himself, 
and  directed  the  vendors  to  draw  bills  upon  Smith,  Lind- 
say, and  Co.,  and  make  out  invoices  to  that  house,  which 
was  then  a  house  of  good  credit,  and  without  whose  secur- 
ity Hodgson  could  not  have  obtained  credit  and  made  the 
purchases.  Smith,  Lindsay,  and  Co.  received  from  the  de- 
fendant a  commission  of  from  2  and  one-half  to  5  per  cent, 
upon  the  goods.  The  vendors  entered  the  goods  in  their  own 
books,  in  the  names  of  Smith,  Lindsay,  and  Co.,  made  out 
the  invoices  in  the  names  of,  and  sent  them  to  Smith,  Lind- 
say, and  Co.,  and  drew  bills  upon  them  for  the  amount, 
which  Smith,  Lindsay,  and  Co.  accepted:  the  defendant  in- 
sisted that  he  purchased  as  the  agent  of  Smith,  Lindsay, 
and  Co.,  and  in  their  names,  and  on  their  account,  as  he 
used  to  do  when  in  their  employ.  There  was  proof,  how- 
ever, of  his  being  the  principal,  and  having  bought  the 
goods  on  his  own  account :  The  plaintiffs  obtained  a  ver- 
dict, and  Mansfield,  C.  J.,  in  summing  up  the  evidence,  ob- 

(123) 


124  LIABILITY  OF  AX  UNDISCLOSED  PRINCIPAL 

served  to  the  jury,  "that  it  was  admitted  these  goods  were 
never  dehvered  to  Smith,  Lindsay,  and  Co. ;  the  defendant 
had  the  goods,  and  the  profits  and  loss :  Smith,  Lindsay, 
and  Co.  were  only  to  have  a  commission,  for  which  they 
lent  their  credit.  Suppose  a  principal  authorizes  a  factor  to 
sell  goods,  and  he  sells  in  his  own  name,  the  principal  may 
call  upon  the  vendee  for  payment.  It  appeared  that  Hodg- 
son had  been  a  trader  from  1798.  Suppose  Hodgson  had 
not  been  known  to  be  the  buyer,  he  would  have  been  liable ; 
Smith,  Lindsay,  and  Co.  would  only  have  been  nominal 
buyers.  H  Hodgson  had  really  paid  Smith,  Lindsay,  and 
Co.,  it  would  have  depended  upon  circumstances  whether  he 
would  be  liable  to  pay  for  the  goods  over  again;  if  it  would 
have  been  unfair  to  have  made  him  liable,  he  would  not 
have  been  so.  What  pretence  was  there  that  the  plaintiffs 
should  be  thrown  upon  the  insolvent  estate  of  Smith,  Lind- 
say, and  Co.,  who  never  had  the  goods?  This  was  a 
stronger  case  than  that  of  a  dormant  partner.  The  buyer 
must  be  liable,  though  a  third  person  may  also,  unless  there 
is  an  express  agreement  that  the  buyer  shall  not  be  liable." 
The  jury  found  a  verdict  for  the  plaintiffs.  A  motion  was 
made  in  the  following  term  to  set  aside  the  verdict,  and 
have  a  new  trial;  but  the  Court  refused  it.^ 


^Accord:  Isham  v.  Burgett,  157  Mass.  546,  1893.  (The  X  Co.  was 
incorporated  to  build  an  electric  line.  No  capital  was  paid  in.  B  and  C 
built  the  line  with  their  own  funds  and  received  all  the  stock  of  the 
company  in  payment.  During  the  course  of  construction  B  ordered 
from  A  certain  poles,  stating  that  they  were  for  the  company.  A 
sued  B  for  the  price  of  the  poles  and  recovered.  Holmes,  J. :  "The 
Judge  was  warranted  in  finding  that  the  real  principal,  as  well  as  the 
mouth  piece  of  the  transaction,  was  the  defendant,  so  that,  although  he 
used  the  name  of  his  creature,  the  corporation,  in  such  a  way  as  to 
bind  it  to  the  plaintiffs  at  their  election,  still,  when  they  discovered  the 
facts,  they  had  the  right  also  to  go  against  him.  *  *  *  jf  tj^g  defendant 
saw  fit  to  use  the  name  of  the  corporation  on  his  own  behalf,  as  rep- 
resenting himself  when  engaged  in  a  particular  business,  he  cannot 
complain  of  being  held  if  the  fact  happens  to  be  discovered.") 


THOAISOX  V.  DAVENPORT  125 


THOMSON  V.  DAVENPORT. 

In  the  Court  of  King's  Bench,  1829. 

9  Barncwall  and  Crcsswell's  Reports,  78. 

This  was  a  writ  of  error,  brought  upon  a  judginent 
obtained  in  the  borough  court  of  Liverpool  against  the 
plaintiff  in  error.  The  plaintiff  below  declared  for  goods 
sold  and  delivered.  Plea,  general  issue.  Upon  the  trial 
before  the  mayor,  and  bailifTs,  assisted  by  the  recorder,  a 
bill  of  exceptions  was  tendered  to  the  direction  given  by 
the  mayor,  bailiffs,  &c.,  by  the  said  recorder  to  the  jury. 
The  bill  of  exceptions  stated,  that  one  Thos.  AI'Kune  was 
produced  and  examined  upon  oath  as  a  witness  by  the  coun- 
sel for  the  plaintiffs,  to  maintain  the  issue  on  their  parts. 
And  jM'Kune  stated  in  evidence,  that  he.  ^^I'Kune,  was 
established  in  Liverpool  as  a  general  Scotch  agent  and, 
amongst  others,  acted  as  agent  for  the  defendant,  who  re- 
sided in  Dumfries;  that,  in  ]^Iarch,  1823,  he  received  from 
the  defendant  a  letter,  containing  an  order  to  purchase 
various  goods,  and,  amongst  others,  a  quantity  of  glass  and 
earthenware ;  which  letter,  with  the  order,  was  produced  by 
the  plaintiffs'  attorney,  and  was  read  in  evidence  as  fol- 
lows:— "Dumfries,  29th  March,  1823.  Annexed  is  a  list  of 
goods  which  you  will  procure  and  ship  per  Nancy.  Mem- 
orandum of  goods  to  be  shipped :  twelve  crates  of  Stafford- 
shire ware,  crown  window  glass,  ten  square  boxes,"  &c.,  &c. 
That  he,  M'Kune,  provided  himself  with  the  goods  men- 
tioned in  this  letter,  and  that  he  got  the  glass  and  earthen- 
ware from  the  plaintiffs,  who  were  glass  and  earthenware 
dealers  in  Liverpool;  that  at  the  time  he  ordered  the  glass 
and  earthenware,  he  saw  the  plaintiff,  IMountford  Fynney, 
himself,  and,  to  the  best  of  his  recollection,  told  him,  that 
he,  M'Kune,  had  an  order  to  purchase  some  goods,  and 


126  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

that  they  were  the  same  house  for  wliom  he  had  purchased 
goods  from  the  plaintiffs  the  preceding  year;  and  he  also 
stated,  to  the  best  of  his  recollection,  that  as  he  was  a 
stranger  to  the  nature  of  the  goods,  he  hoped  that  the  plain- 
tiffs would  let  him  have  the  same  as  before,  to  save  him 
from  blame  by  his  employer;"  but  he,  M'Kune,  did  not 
shew  the  plaintiffs  the  letter  containing  the  order,  nor  did 
he  mention  the  name  of  any  principal;  that  he  then  either 
gave  the  plaintiff.  Mountford  Fynney,  a  copy  of  the  order, 
or  produced  to  him  the  original  order,  that  Fynney  might 
himself  take  a  copy,  but  he  rather  thought  the  former  was 
the  fact,  and  that  the  plaintiff,  Fynney,  did  not  see  the 
original,  though  he  could  not  say  positively;  that  the  plain- 
tiff accordingly  furnished  the  glass  and  earthenware,  the 
amount  of  which,  deducting  the  discount,  was  193/.  ys.  Sd., 
but  adding  the  discount,  219/.  10s.,  and  rendered  invoices 
thereof  to  M'Kune,  headed  thus:  "Mr.  Thomas  INFKune 
bought  of  John  and  James  Davenport"  (which  was  the 
plaintiffs'  firm)  ;  that  M'Kune  entered  the  net  amount  (193/. 
/S.  8d.)  to  the  credit  of  the  plaintiffs  in  an  account  with 
them  in  his  books,  and  charged  the  same  sum,  with  the  ad- 
dition of  2  per  cent,  for  the  commission,  to  the  debit  of  the 
defendant  in  an  account  with  him,  which  was  according  to 
his  invariable  course  of  dealing;  and  that  he  sent  to  the 
defendant  a  general  invoice  of  all  the  goods  purchased, 
comprising  the  glass  and  earthenware,  but  not  mentioning 
the  plaintiffs'  names;  that  afterwards,  in  April,  1823,  and 
before  the  credit  for  the  goods  had  expired,  M'Kune  be- 
came insolvent,  though  up  to  the  day  of  his  stopping  pay- 
ment he  was  in  good  credit,  and  could  have  bought  goods 
on  trust  to  the  amount  of  20,000/. ;  whereupon  the  said 
mayor  and  bailiffs,  by  the  said  recorder,  after  stating  the 
evidence,  told  the  jury  that,  from  the  distance  of  time  since 
the  sale  took  place,  there  was  some  uncertainty  in  the  evi- 
dence of  M'Kune  as  to  the  precise  words  used  by  him  to 
t;:2  plaintiffs  at  the  time  he  gave  them  the  order  for  the 
goods;  but  it  appeared  to  them   (the  said  recorder)   upon 


THOMSON  V.  DAVENPORT  127 

the-  evidence,  that  the  name  of  the  defendant  as  principal 
was  not  then  communicated  or  known  to  the  plaintiffs; 
and  directed  the  jury,  that  if  they  were  of  opinion  that 
the  defendant's  name  as  principal  was  mentioned  by 
M'Kune  to  the  plaintiffs  at  the  time  the  order  was  given,  or 
that  the  plaintiffs  then  knew  that  the  defendant  was  the 
principal,  their  verdict  ought  to  be  for  the  defendant;  but 
if  they  were  of  opinion  that  the  defendant's  name  as  the 
principal  was  not  mentioned  by  ^M'Kune  to  the  plaintiffs 
at  the  time  of  the  order  being  given,  and  that  the  plain- 
tiffs did  not  then  know  that  the  defendant  was  the  prin- 
cipal, and  they  did  not  think,  upon  all  the  said  facts  of  the 
case,  that  the  plaintiffs  at  the  time  of  the  order  being  given 
knew  who  the  principal  was,  so  that  they  then  had  a  power 
of  electing  whether  they  would  debit  the  defendant  or 
M'Kune,  they  ought  to  find  a  verdict  for  the  plaintiffs ;  and 
that,  although  the  plaintiffs  at  the  time  of  the  sale  might 
think  that  ^I'Kune  was  not  buying  the  goods  upon  his  own 
account,  yet  if  his  principal  was  not  communicated  or  made 
known  to  them,  that  circumstance  ought  to  make  no  differ- 
ence in  the  case.  The  jury,  after  finding  as  a  fact  that  the 
letter  containing  the  order  was  not  shewn  and  made  known 
to  the  plaintiffs,  gave  their  verdict  for  the  plaintiffs  below 
for  219/.  10^.  It  was  contended,  that  the  mayor  and  bail- 
iffs, by  the  recorder,  ought  to  have  directed  the  jury  that 
if  they  were  satisfied  that  Davenport,  &c.,  at  the  time  of 
the  order  being  given  knew  that  M'Kune  was  buying  die 
goods  as  an  agent,  even  though  his  principal  was  not  com- 
municated or  made  known  to  them,  they,  by  afterwards 
debiting  ]M'Kune,  and  so  rendering  the  said  invoices,  had 
elected  to  take  him  for  their  debtor,  and  had  precluded 
themselves  from  calling  on  Thomson.^ 

Lord  Tenterden,  C.  J. :  I  am  of  opinion  that  the 
direction  given  by  the  learned  Recorder  in  this  case  was 
right,  and  that  the  verdict  was  also  right.     I  take  it  to  be 


The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


128  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

a  general  rule,  that  if  a  person  sells  goods  (supposing  at 
the  time  of  the  contract  he  is  dealing  with  a  principal), 
but  afterwards  discovers  that  the  person  with  whom  he  has 
been  dealing  is  not  the  principal  in  the  transaction,  but 
agent  for  a  third  person,  though  he  may  in  the  meantime 
have  debited  the  agent  with  it,  he  may  afterwards  recover 
the  amount  from  the  real  principal ;  subject,  however,  to 
this  qualification,  that  the  state  of  the  account  between  the 
principal  and  the  agent  is  not  altered  to  the  prejudice  of 
the  principal.  On  the  other  hand,  if  at  the  time  of  the  sale 
the  seller  knows,  not  only  that  the  person  who  is  nominally 
dealing  with  him  is  not  principal  but  agent,  and  also  knows 
who  the  principal  really  is,  and,  notwithstanding  all  that 
knowledge,  chooses  to  make  the  agent  his  debtor,  dealing 
with  him  and  him  alone,  then,  according  to  the  cases  of 
Addison  V.  Gandasscqui  [4  Taunt.  574],  and  Patcrson  v. 
Gandasscqui  [15  East,  62],  the  seller  cannot  afterwards,  on 
the  failure  of  the  agent,  turn  round  and  charge  the  principal, 
having  once  made  his  election  at  the  time  when  he  had  the 
power  of  choosing  between  the  one  and  the  other.  The  pres- 
ent is  a  middle  case.  At  the  time  of  the  dealing  for  the  goods 
the  plaintiffs  were  informed  that  M'Kune,  who  came  to 
them  to  buy  the  goods,  was  dealing  for  another ;  that  is, 
that  he  was  an  agent,  but  they  were  not  informed  who 
the  principal  was.  They  had  not,  therefore,  at  that  time 
the  means  of  making  their  election.  It  is  true  that  they 
might,  perhaps,  have  obtained  those  means  if  they  had 
made  further  enquiry;  but  they  made  no  further  enquiry. 
Not  knowing  who  the  principal  really  was,  they  had  not 
the  power  at  that  instant  of  making  their  election.  That 
being  so,  it  seems  to  me  that  this  middle  case  falls  in  sub- 
stance and  effect  within  the  first  proposition  which  I  have 
mentioned,  the  case  of  a  person  not  known  to  be  an  agent; 
and  not  within  the  second,  where  the  buyer  is  not  merely 
known  to  be  agent,  but  the  name  of  his  principal  is  also 
known.  There  may  be  another  case,  and  that  is  where  a 
British  merchant  is  buying  for  a  foreigner.     According  to 


THOMSON  V.  DAVENPORT  129 

the  universal  understanding  of  merchants,  and  of  all  per- 
sons in  trade,  the  credit  is  then  considered  to  be  given  to 
the  British  buyer,  and  not  to  the  foreigner.  In  this  case, 
the  buyers  lived  at  Dumfries ;  and  a  question  might  have 
been  raised  for  the  consideration  of  the  jury.  Whether, 
in  consequence  of  their  living  at  Dumfries,  it  may  not  have 
been  understood  among  all  persons  at  Liverpool,  where 
there  are  great  dealings  with  Scotch  houses,  that  the  plain- 
tiffs had  given  credit  to  jM'Kune  only,  and  not  to  a  person 
living,  though  not  in  a  foreign  country,  yet,  in  that  part 
of  the  king's  dominions  which  rendered  him  not  amenable 
to  any  process  of  our  courts?  But,  instead  of  directing  the 
attention  of  the  Recorder  to  any  matter  of  that  nature, 
the  point  insisted  upon  by  the  learned  counsel  at  the  trial 
was,  that  it  ought  to  have  been  part  of  the  direction  to 
the  jury,  that  if  they  were  satisfied  the  plaintiffs,  at  the 
time  of  the  order  being  given,  knew  that  AI'Kune  was 
buying  goods  for  another,  even  though  his  principal  might 
not  be  made  known  to  them,  they,  by  afterwards  debiting 
M'Kune,  had  elected  him  for  their  debtor.  The  point  made 
by  the  defendant's  counsel,  therefore,  was,  that  if  the 
plaintiffs  knew  that  M'Kune  was  dealing  with  them  as 
agent,  though  they  did  not  know  the  name  of  the  principal, 
they  could  not  turn  round  on  him.  The  Recorder  thought 
otherwise :  he  thought  that  though  they  did  know  that 
MTvune  was  buying  as  agent,  yet,  if  they  did  not  know 
who  his  principal  really  was,  so  as  to  be  able  to  write  him 
down  as  their  debtor,  the  defendant  was  liable,  and  so  he 
left  the  question  to  the  jury,  and  I  think  he  did  right  in  so 
doing.  The  judgment  of  the  Court  below  must  therefore 
be  affirmed.^ 


■The  opinions  of  Bayley,  J.,  and  Littledale.  J.,  reaching  the  same 
result  are  omitted.  In  the  course  of  his  opinion  Bayley,  J.,  says : 
"Where  a  purchase  is  made  by  an  agent,  the  agent  does  not  of  necessity 
so  contract  as  to  make  himself  personally  liable;  but  he  may  do  so.  If 
he  does  make  himself  personally  liable,  it  does  not  follow  that  the 
principal  may  not  be  liable  also,  subject  to  this  qualification,  that  the 
principal  shall  not  be  prejudiced  by  being  made  personally  liable,  if  the 


130  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

Judgment  affirmed.^ 


justice  of  the  case  is  that  he  should  not  be  personally  liable.  If  the 
principal  has  paid  the  agent,  or  if  the  state  of  accounts  between  the 
agent  here  and  the  principal  would  make  it  unjust  that  the  seller 
should  call  on  the  principal,  the  fact  of  payment,  or  such  a  state  of  ac- 
counts, would  be  an  answer  to  the  action  brought  by  the  seller  where 
lie  had  looked  to  the  responsibility  of  the  agent."  Littledale,  J.,  does 
not  touch  on  the  etifect  on  the  rights  of  the  third  person  of  the  undis- 
closed principal's  settlement  with  his  agent.  Parke,  J.,  having  been  con- 
cerned as  counsel  gave  no  opinion. 

^  As  to  xcliat  amounts  or  does  not  amount  to  an  election  see: 
Priestly  v.  Fernie,  3  H.  &  C.  977,  1865.  (C,  master  of  a  vessel 
signed  a  bill  of  lading  in  his  own  name.  A  sued  C  and  obtained  a  judg- 
ment. The  judgment  remaining  unsatisfied  A  brought  suit  against 
B,  the  owner  of  the  vessel,  for  the  non-delivery  of  the  goods.  B 
pleaded  the  suit  against  C.  Demurrer  to  plea  overruled,  and  judg- 
ment for  B.  Bramwell,  B :  "Where  the  agent,  having  made  a  contract 
in  his  own  name,  has  been  sued  on  it  to  judgment,  there  can  be  no 
doubt  that  no  second  action  would  be  obtainable  against  the  principal. 
The  very  expression  that  where  a  contract  is  so  made  the  contractee 
has  an  election  to  sue  agent  or  principal,  suppose  he  can  only  sue  one 
of  them,  that  is  to  say,  sue  to  judgment.") 

Calder  z'.  Dobell,  L.  R.  6  C.  P.  486,  1871.  (B  appointed  C  his,  B's, 
agent  to  buy  cotton.  C  bought  cotton  from  A  giving  B  as  his  principal, 
bought  and  sold  notes  being  exchanged  between  A  and  C.  A  made  out 
an  invoice  to  C,  and  A  demanded  payment  from  C.  C  refused.  A 
sued  B.  Held:  that  the  acts  of  A  did  not  amount  to  an  election  to 
look  only  to  C  and  that  he,  A,  could  now  recover  from  B.) 

Curtis  V.  Williamson,  L.  R.  10  Q.  B.  57,  1874.  { C  was  the  agent  of 
B.  Without  disclosing  agency  C  purchased  for  B  goods  of  A.  C  be- 
came insolvent  and  A  became  aware  of  the  agency.  A  sent  an  affidavit 
of  proof  of  debt  due  against  estate  of  C,  which  affidavit,  against  A's 
subsequent  protest,  was  filed.  A  sued  B.  Verdict  for  A.  Rule  to  enter 
non-suit  on  the  ground  that  A  had  elected  to  hold  the  agent  discharged. 
Quain,  J. :  "In  general,  the  question  of  election  can  only  be  properly 
dealt  with  as  a  question  of  fact  for  the  jury  *  *  *  but  there  may  no 
doubt  be  cases  in  which  the  act  of  the  contractee  in  regard  to  his  deal- 
ings with  or  proceeding  against  the  agent,  with  full  knowledge  of  the 
facts  and  freedom  of  choice,  may  be  such  as  to  preclude  him  in  point 
of  law  from  resorting  to  the  principal." 

Merrill  v.  Kenyon.  48  Conn.  314,  1880.  (C  was  the  agent  of  B.  C 
bought  goods  from  A  without  disclosing  agency.  A  subsequently  took 
notes  from  C  on  account  of  debt.  A  sued  B  for  the  price  of  the  goods. 
B  asked  the  Court  to  charge  that  if  A  knew  that  C  was  an  agent,  and 
then  received  the  notes,  the  presumption  was  that  A  received  C  as  his 
debtor  and  he.  A,  could  not  recover.  The  Court  refused  to  charge  as  re- 
quested, but  did  charge  that  if  A  at  the  time  he  took  the  notes  knew 
that  C  was  the  agent  of  B,  then  the  presumption  was  that  A  had 
made  an  election.  The  Court  also  charged  that  A  was  not  obliged  to 
make  their  election  on  a  mere  rumor,  "but  only  on  such  information  as 
they  could  rely  upon."  Verdict  for  A.  On  appeal,  held :  that  the  law 
had  been  properly  presented  to  the  jury.) 

Byington  z:  Simpson,  134  ^lass.  169,  1883.  (C  was  the  agent  of  B. 
C  entered  into  a  contract  for  B  with  A  signinc  the  contract  as  "agent" 
but  not  disclosing  who  he  was  agent  for.  A  sued  B  and  recovered. 
Holmes,  J.,  said :  "The  most  that  could  fairly  be  argued  in  any  case 
would  be,  that,  under  some  circumstances,  proof  that  the  other  party 


TH0M50X  z:  DAVENPORT  131 

knew  of  the  agency,  and  yet  accepted  a  writing  which  did  not  refer 
to  it,  and  which  in  its  natural  sense  bound  the  agent  alone,  might  tend 
to  show  that  the  contract  was  not  made  with  any  one  but  the  party 
whose  name  was  signed ;  that  the  agent  did  not  sign  as  agent,  and  was 
not  understood  to  do  so,  but  was  himself  the  principal.  But  these  are 
questions  of  fact,  and,  as  a  matter  of  fact,  it  is  obvious,  and  it  is 
found,  that  the  defendant  was  the  principal,  and  that  the  contract, was 
made  with  her.") 


132  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 


FRADLEY  v.  HYLAND. 

In  the  Circuit  Court  of  the  United  States,  for  the 
Southern  District  of  New  York,  1888. 

S7   Federal   Reporter,   49. 

Wallace,  J. :  The  libel  sets  forth  two  causes  of  action 
for  supplies  purchased  by  one  Gibson.^ 

The  facts  which  appear  in  evidence  are  these :  During 
the  period  in  which  the  supplies  were  purchased,  one  Gib- 
son, who  was  the  owner,  and  was  managing  certain  canal- 
boats  of  his  own,  was  employed  by  the  appellant,  to  manage 
certain  canal-boats  for  the  latter.  Gibson  was  to  obtain 
employment  for  the  boats,  and  return  the  net  earnings 
monthly  to  appellant,  after  paying  for  all  repairs  and  sup- 
plies, and  deducting  his  own  commissions.  His  instructions 
were  not  to  obtain  supplies  upon  credit,  but,  if  not  in  funds 
from  the  earnings,  to  call  upon  the  appellant.  Monthly  set- 
tlements of  account  took  place  between  Gibson  and  the  ap- 
pellant, in  which  Gibson  was  allowed  all  items  for  supplies 
paid  or  contracted  for  by  him  against  the  earnings  of  the 
boats,  and  a  considerable  fund  was  always  left  in  his  hands 
by  the  appellant.  Gibson  ceased  to  act  as  appellant's  agent 
September  i,  1886.  The  supplies  were  sold  to  him  prior  to 
that  time.  The  libellant  supposed  that  Gibson  was  the 
owner  of  all  the  boats  he  was  managing,  and  dealt  with 
him  as  such,  selling  him  supplies  for  all  indiscriminately, 
charging  the  price  to  him,  and  taking  his  notes  from  time 
to  time,  or  those  of  one  Isham,  his  clerk.  The  claim  to  re- 
cover the  part  of  these  supplies  used  on  appellant's  boats 
is  the  first  cause  of  action  set  forth  in  the  libel.  One  Kelly 
had  also  sold  supplies  to  Gibson  for  the  same  boats,  sup- 


'  Only  that  part  of  the  opinion  which  relates  to  the  first  cause  of 
action  is  reprinted. 


FRADLEY  v.  HYLAND  133 

posing  that  Gibson  was  the  owner,  and  had  received  Gib- 
son's notes,  or  notes  of  Gibson's  clerk,  for  the  amount. 
After  these  notes  had  matured,  Gibson  asked  the  Hbellant 
to  pay  them  for  him  to  Kelly,  and  the  Hbellant  did  so,  re- 
ceiving new  notes  from  Gibson  for  the  amount.  There'was 
no  assignment  to  libellant  of  Kelly's  original  demand  against 
Gibson.  The  claim  for  the  supplies  thus  sold  by  Kelly  to 
Gibson  is  the  second  cause  of  action  set  forth  in  the  libel. 
After  Gibson  ceased  to  act  as  agent  for  appellant,  the  libel- 
lant discovered  that  some  of  the  supplies  had  been  pur- 
chased for  the  appellant's  boats,  and,  being  unable  to  col- 
lect his  demands  of  Gibson,  made  claim  against  the  appel- 
lant therefor.  Until  then  the  appellant  did  not  know  of  the 
transactions  between  Gibson  and  the  libellant,  or  between 
Gibson  and  Kelly.  The  moneys  left  by  appellant  in  Gib- 
son's hands  were  at  all  times  more  than  the  amount  of  the 
libellant's  demands,  and  Gibson  was  indebted  to  the  appel- 
lant in  more  than  that  amount  when  he  left  the  appellant's 
employ,  and  when  this  libel  was  filed. 

As  to  the  first  cause  of  action  no  question  is  made  by 
the  appellant  that  it  is  not  of  admiralty  cognizance,  but  he 
insists  that  he  is  not  liable  as  a  principal  for  the  supplies 
sold  to  his  agent  by  the  libellant,  under  the  circumstances 
of  the  case.  The  general  rule  is  familiar  that,  when  goods 
are  bought  by  an  agent,  who  does  not  at  the  time  disclose 
that  he  is  acting  as  agent,  the  seller,  although  he  has  relied 
solely  upon  the  agent's  credit,  may,  upon  discovering  the 
principal,  resort  to  the  latter  for  payment.  But  the  rule 
which  allows  the  seller  to  have  recourse  against  an  undis- 
closed principal  is  subject  to  the  qualification  stated  by  Lord 
Mansfield,  in  Railton  v.  Hodgson,  4  Taunt.  576,  and  by 
Tenterden,  C.  J.,  and  Bayley,  J.,  in  Thomson  v.  Daven- 
port, 9  Barn.  &  C.  78.  As  stated  by  Mr.  Justice  Bayley, 
it  is  "that  the  principal  shall  not  be  prejudiced  by  being 
made  personally  liable  if  the  justice  of  the  case  is  that  he 
should  not  be  personally  liable.  If  the  principal  has  paid 
the  agent,  or  if  the  state  of  accounts  between  the  agent 


134  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

here  and  the  principal  would  make  it  unjust  that  the  seller 
should  call  on  the  principal,  the  fact  of  payment  or  such  a 
state  of  accounts  would  be  an  answer  to  the  action  brought 
by  the  seller,  where  he  has  looked  to  the  responsibility  of 
the  agent."  The  principal  must  respond  to  and  may  avail 
himself  of  a  contract  made  with  another  by  an  undisclosed 
agent.  When  he  seeks  to  enforce  a  bargain  or  purchase 
made  by  his  agent  the  rule  of  law  is  that,  if  the  agent  con- 
tracted as  for  himself,  the  principal  can  only  claim  subject 
to  all  equities  of  the  seller  against  the  agent.  In  the  lan- 
guage of  Parke,  B. :  "He  must  take  the  contract  subject 
to  all  equities,  in  the  same  way  as  if  the  agent  were  the  sole 
principal"  (Beckham  v.  Drake,  9  Mees.  &  W.  98),  and 
accordingly  subject  to  any  right  of  set-off  on  the  part  of 
the  seller  (Borries  v.  Bank,  29  L.  T.  N.  S.  689).  Thus 
the  rights  of  the  principal  to  enforce,  and  his  liability  upon, 
a  contract  of  sale  or  purchase  made  by  his  agent,  without 
disclosing  the  fact  of  the  agency,  are  precisely  co-extensive, 
as  regards  the  other  contracting  party,  if  the  limitation  of 
his  liability  is  accurately  stated  in  the  earlier  cases.  The 
qualification  of  the  principal's  liability  to  respond  to  his 
agent's  contract,  as  stated  in  the  earlier  authorities  men- 
tioned, was  narrowed  by  the  interpretation  adopted  in  Heald 
V.  Kcnworthy,  10  Exch.  739,  to  the  effect  that  the  principal 
is  not  discharged  from  full  responsibility  unless  he  has  been 
led  by  the  conduct  of  the  seller  to  make  payment  to  or  set- 
tle with  the  agent;  and  the  doctrine  of  this  case  has  been 
reiterated  in  many  subsequent  cases,  both  in  England  and 
in  this  country,  where  the  agent  did  not  contract  as  for  him- 
self, but  as  a  broker,  or  otherwise  as  representing  an  un- 
disclosed principal.  One  of  the  more  recent  English  cases 
of  this  class  is  Davison  v.  Donaldson,  9  O.  B.  Div.  623. 
but,  as  is  shown  in  Armstrong  v.  Stokes,  L.  R.  7,  Q.  B.  599, 
the  version  of  Heald  v.  Kenworthy,  while  a  correct  inter- 
pretation of  the  rule  of  the  principal's  liability,  when  ap- 
plied to  cases  in  which  the  seller  deals  with  the  agent  rely- 
ing upon  the  existence  of  an  undisclosed  principal,  is  not 


FRADLEY  v.  HYLAND  135 

to  be  applied  in  those  in  which  the  seller  has  given  credit 
solely  to  the  agent,  supposing  him  to  be  the  principal.  This 
case  decides  that  the  principal  is  not  liable  when  the  seller 
has  dealt  with  the  agent  supposing  him  to  be  the  principal, 
if  he  has  in  good  faith  paid  the  agent  at  a  time  when  ihe 
seller  still  gave  credit  to  the  agent,  and  knew  of  no  one  else. 
See,  also,  Irz'inc  v.  Watson,  5  O.  B.  Div.  102.  Under  such 
circumstances  it  is  immaterial  that  the  principal  has  not 
been  misled  by  the  seller's  conduct  or  laches  into  paying  or 
settling  with  his  agent.  It  is  enough  to  absolve  him  from 
liability  that  he  has  in  good  faith  paid  or  settled  with  his 
agent.  In  that  case  the  court  was  dealing  with  a  contract 
made  by  an  agent  which  was  within  the  scope  of  the  author- 
ity conferred  on  him,  but  which  was  nevertheless  made  by 
the  agent  as  though  he  were  acting  for  himself  as  principal. 
In  the  present  case  Gibson  had  no  authority  at  all  to  make 
a  purchase  upon  the  credit  of  the  appellant.  But  as  it  ap- 
pears that  appellant,  in  the  monthly  settlements  of  account 
with  Gibson,  allowed  him  out  of  the  earnings  charges  for 
supplies  for  which  the  latter  had  not  actually  paid,  he  must 
be  deemed  to  have  authorized  Gibson  to  purchase  supplies 
for  him  upon  Gibson's  own  credit.  Under  the  circum- 
stances, if  Gibson  had  purchased  supplies,  purporting  to 
act  as  an  agent  of  appellant  in  doing  so,  appellant,  by  con- 
senting to  their  being  used  for  his  benefit,  and  by  allowing 
the  price  in  his  settlements  with  Gibson,  would  have  been 
liable  to  those  who  sold  to  him  upon  the  theory  of  ratifica- 
•  tion.  But,  as  Gibson  did  not  assume  to  act  as  agent  in 
making  the  purchases,  there  is  no  basis  for  applying  the 
doctrine  of  ratification. 

Very  different  considerations  govern  the  case  in  which 
an  agent  who  assumes  to  represent  an  undisclosed  principal 
buys  of  a  seller  upon  credit,  and  one  in  which  the  agent 
assumes  to  be  acting  for  himself,  and  the  seller  deals  with 
him,  and  gives  him  exclusive  credit,  supposing  him  to  be 
the  only  principal.  In  the  first,  if  the  agent  has  authority, 
express  or  implied,  to  buy  upon  credit  for  the  principal,  or 


136  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

ostensible  authority  to  do  so,  upon  which  the  seller  relies, 
then,  by  the  familiar  rules  of  law,  tlie  contract  is  the  con- 
tract of  the  principal,  and  is  none  the  less  so  because  the 
name  of  the  principal  does  not  happen  to  have  been  dis- 
closed.    The  principal  is  bound  by  the  acts  of  his  agent 
within  the  scope  of  his  real  or  apparent  authority;  and  the 
seller  understands  that,  even  though  he  may  hold  the  agent 
personally  responsible,  he  may  also  resort  to  the  undisclosed 
principal.     But  in  the  other,  as  the  seller  does  not  rely  upon 
any  ostensible  authority  of  the  one  with  whom  he  contracts 
to  represent  a  third  person,  he  can  only  resort  to  the  third 
person  as  principal,  and  charge  him  as  such,  \yhen  the  pur- 
chase is  made  by  one  having  lawful  authority  to  bind  the 
third  person.     It  is  immaterial,  in  such  a  case,  whether  the 
contract  is  made  by  an  agent  who  is  employed,  in  a  contin- 
uous employment  or  in  a  single  transaction,  by  a  principal, 
or  whether  he  is  one  who  may  be  deemed  a  general,  instead 
of  a  special  agent.     "When  the  agency  is  not  held  out  by 
the  principal  by  any  acts  or  declarations  or  implications  to 
be  general  in  regard  to  the  particular  act  or  business,   it 
must  from  necessity  be  construed  according  to  its  real  na- 
ture and  extent;  and  the  other  party  must  act  at  his  own 
peril,  and  is  bound  to  inquire  into  the  nature  and  extent  of 
the  authority  actually  conferred.     In  such  a  case  there  is 
no  ground  to  contend  that  the  principal  ought  to  be  bound 
by  the  acts  of  the  agent  beyond  what  he  has  apparently 
authorized,  because  he  has  not  misled  the  confidence  of  the 
other  party  who  has  dealt  with  the  agent."     Story,  Ag.  Sec. 
133.     It  is  therefore  difficult  to  understand  how,  as  an  orig- 
inal  proposition,    it    could   be    reasonably   maintained    that 
there  is  any  liability  on  the  part  of  one  who  has  employed 
another  to  manage  his  interests  in  a  business,  or  series  of 
transactions,  in  which,  as  an  incident,  purchases  of  goods 
are  to  be  made,  has  given  him  instructions  not  to  purchase 
on  credit,  and  has  supplied  him  with  funds  to  purchase  for 
cash,  to  a  seller  who  has  sold  to  the  person  employed  upon 
credit,  and  dealt  with  him  as  the  only  principal.     Taft  v. 


FRADLEY  v.  HYLAND  137 

Baker,  lOO  Mass.  68.  Of  course  he  would  be  liable,  and 
the  instructions  not  to  buy  on  credit  would  go  for  nothing, 
if  he  did  not  supply  the  agent  with  funds  to  pay  for  the 
necessary  goods,  because  in  that  case  the  agent  would  have 
implied  authority  to  buy  them  on  credit.  So,  also,  in  aj:ase 
which  may  be  supposed,  where  a  principal  knows,  or  ought 
to  know,  that  the  agent  is  buying  on  credit  in  his  own  name, 
yet  the  principal  takes  all  the  income  of  the  business  with- 
out making  any  provision  for  payment  to  those  who  have 
trusted  the  agent,  the  principal  would  be  liable,  because  in 
such  a  case  his  conduct  would  be  inconsistent  with  good 
faith,  and  he  ought  not  to  be  permitted  to  avail  himself  of 
tlie  benefits  without  incurring  full  responsibility  for  the 
agent's  acts.  But  it  is  probably  too  late  to  consider  the 
questions  thus  suggested  upon  principle;  and  it  may  be  ac- 
cepted as  law  that  the  seller,  under  the  circumstances  of  a 
case  like  the  present,  upon  discovery  of  the  principal,  can 
resort  to  and  recover  of  him,  if  he  has  not  bona  fide  paid 
the  agent  in  the  meantime,  or  has  not  made  such  a  change 
in  the  state  of  the  account  between  the  agent  and  himself 
that  he  would  suffer  loss  if  he  should  be  compelled  to  pay 
the  seller.  Story,  Ag.  Sec.  291,  i  Pars.  Cont.  63;  Fish  v. 
Wood,  4  E.  D.  Smith,  327;  Thomas  v.  Atkinson,  38  Ind. 
248;  Clealand  \.  Walker,  11  Ala.  1058;  McCidlough  v. 
Thompson,  45  N.  Y.  Super.  Ct.  449;  Laing  v.  Butler,  2)7 
Hun,  144.  In  the  case  last  cited  the  Court  used  this  lan- 
guage :  "Where  the  purchase  has  been  made  by  the  agent 
upon  credit  authorized  by  the  principal,  but  without  disclos- 
ing his  name,  and  payment  is  subsequently  made  by  the 
principal  to  the  agent  in  good  faith  before  the  agency  is  dis- 
closed to  the  seller,  then  the  principal  would  not  be  liable." 
According  to  these  authorities,  if  it  should  be  conceded 
that  the  facts  in  the  present  case  warrant  the  inference  that 
the  appellant  gave  Gibson  authority  to  buy  either  upon  his 
own  credit  or  upon  the  credit  of  the  appellant,  the  libellant 
cannot  recover.  It  certainly  is  not  material  that  the  appel- 
lant did  not  pay  Gibson,  or  make  any  settlement  with  him, 


138  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

on  account  of  the  libellant's  demands  specifically.  It  is 
enough  that  he  did  settle  with  Gibson  for,  and  allowed  him 
to  retain  in  his  hands  sufficient  moneys  to  pay,  all  outstand- 
ing liabilities  contracted  by  him  for  the  appellant's  benefit, 
including  the  demands  of  the  libellant.  At  the  time  of 
the  last  settlement  the  appellant  had  paid  the  libellant's  de- 
mands and  all  outstanding  liabilities  contracted  by  Gibson 
as  between  Gibson  and  himself,  and  this  was  before  the 
libellant  knew  any  principal  in  the  purchases  other  than 
Gibson  himself. 


HEFFRON  V.  POLLARD  139 


HEFFRON  V.  POLLARD. 
In  the  Supreme  Court  of  Texas,  1889. 

~i   Texas  Reports,  96. 

Appeal  from  Galveston.  Tried  below  before  Hon.  W. 
H.  Stewart.  At  the  trial  the  judgment  was  for  the  plain- 
tiff.i 

Gaines,  Associate  Justice  :^ 

The  appellee  brought  the  suit  in  the  court  below.  He 
alleged  that  the  defendant,  who  is  appellant  here,  agreed  in 
writing  to  pay  W.  H.  Pollard  &  Co.  and  one  F.  W.  Hen- 
dricks a  certain  price  for  certain  pipe,  the  dimension  of 
which  he  described  in  his  petition,  and  that  he  was  the 
owner  of  the  claim  by  assignment  from  Hendricks  and  his 
partner,  who  with  himself  constituted  the  firm  of  W.  H. 
Pollard  &  Co.  The  substance  of  the  allegations  in  the  peti- 
tion with  reference  to  the  execution  of  the  agreement  is 
that  W.  H.  Pollard  &  Co.  and  F.  W.  Hendricks  "entered 
into  a  contract  in  writing  with  defendant,  the  said  defend- 
ant so  contracting  in  the  name  of  John  W.  Fry,  by  which 
the  said  Pollard  &  Co.  and  the  said  Hendricks  bargained 
and  sold  to  the  said  defendant  a  large  amount  of  property," 
etc.  There  is  an  alternative  allegation  in  the  petition  in 
which  the  execution  of  the  contract  is  set  out  in  substanti- 
ally the  same  language,  but  which  alleges  a  different  effect 
as  to  time  of  delivery  and  payment.  The  defendant  pleaded 
non  est  factum.  Upon  the  trial  the  plaintiff  offered  in  evi- 
dence a  contract  in  writing,  of  which  the  following  is  a 
copy: 

"The    County  of    Galveston,  State    of  Texas. — This 


*  The 'Reporter   does  not  state  the   facts   of  the  case.     His  notes 
of  the  arguments  of  counsel  are  omitted. 

*  Part  of  the  opinion  which  deals  with  a  question   of  practice  is 
omitted. 


140  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

agreement,  made  and  entered  into  by  and  between  John  W. 
Fry  on  the  one  part  and  F.  W.  Hendricks  and  W.  H.  Pol- 
lard &  Co.  on  the  other  part.  It  is  hereby  understood  that 
the  said  John  W.  Fry  shall  take  all  of  the  24  inch  pipe  (con- 
crete), not  exceeding  430  lineal  feet,  and  all  of  the  18  inch 
pipe  (concrete),  not  exceeding  700  lineal  feet,  at  the  fol- 
lowing prices,  viz.,  the  24  inch  pipe  at  $1.50  per  foot  and 
the  18  inch  pipe  at  $1.25  per  foot.  This  said  pipe  to  be 
paid  for  at  the  above  rate  as  used  by  the  said  John  W. 
Fry,  and  that  the  said  John  W.  Fry  shall  not  manufacture 
or  use  any  other  pipe  of  the  above  quoted  sizes  until  all  the 
above  noted  pipe  is  consumed  in  the  city  of  Galveston. 

[Signed]  "John  W.  Fry,  per  Heffron, 

"W.  H.  Pollard  &  Co., 
"F.  W.  Hendricks. 
^'Witnesses : 

"K.  A.  Olcott, 
"W.  J.  Junker." 

In  order  to  prove  the  execution  of  the  contract  so  of- 
fered plaintiff  was  sworn  as  a  witness  and  testified  that 
"the  written  contract  was  signed  J.  W.  Fry,  per  Heffron, 
and  that  it  was  so  signed  by  Heffron  for  himself  and  in  his 
presence" — meaning  in  the  presence  of  the  plaintiff.  He 
also  testified  that  he  had  made  diligent  search  for  the  sub- 
scribing witnesses  but  could  not  find  them.  The  defendant 
was  then  placed  on  the  stand  by  plaintiff  and  testified  that 
he  signed  the  contract  "as  it  purported  J.  W.  Fry,  per  Heff- 
ron, but  that  he  signed  it  as  the  agent  of  Fry  and  not  for 
himself,  and  that  he  had  no  personal  interest  in  it."  The 
Court  thereupon  admitted  the  contract  over  the  objection  of 
the  defendant  and  the  defendant  excepted. 

We  may  treat  the  case  for  the  purposes  of  this  opinion 
as  if  there  was  sufficient  evidence  introduced  to  show  that 
in  executing  the  contract  Heffron  used  the  name  of  Fry 
in  order  to  make  the  contract  for  his  own  benefit.  We 
think   the   evidence   subsequently   introduced,    though   con- 


HEFFROX  i:  POLLARD  141 

flicting,  warranted  the  jury  in  finding  that  the  plaintiff's 
theory  of  the  case  was  the  true  one,  and  it  may  be  doubted 
whether  this  would  not  have  cured  the  error  of  introducing 
it  for  want  of  sufficient  evidence  upon  that  point,  if  error 
it  were. 

But  the  question  presents  itself  whether  in  a  contract 
like  this,  which  is  made  in  the  name  of  a  principal  and 
which  is  signed  in  his  name  by  another  as  his  agent,  it  is 
competent  to  show  by  parol  evidence  in  order  to  recover  on 
the  written  contract  itself  that  in  signing  the  agreement 
the  one  who  purported  to  sign  as  agent  signed  the  name  of 
the  principal  for  his  own  benefit  and  with  the  intention  to 
bind  himself?  We  have  been  unable  to  find  any  case  in 
which  this  exact  point  has  been  determined.  There  are  few 
branches  of  law  that  have  given  rise  to  more  adjudications 
than  that  of  principal  and  agent,  and  the  cases  are  especi- 
ally numerous  in  which  the  liability  of  the  principal  or  agent 
as  to  third  parties  is  discussed.  There  are  certain  princi- 
ples, however,  wdiich  are  well  settled.  If  the  principal  be 
disclosed,  and  it  appear  upon  the  face  of  the  contract  that 
agent  does  not  intend  to  bind  himself,  the  agent  is  not  lia- 
ble. If  the  principal  be  not  disclosed  it  is  universally  con- 
ceded as  to  non-negotiable  contracts  not  under  seal  that 
parol  evidence  is  admissible  to  show  the  principal  and  to 
hold  him  liable  upon  a  contract  made  in  the  name  of  the 
agent  for  his  benefit.  This  may  seem  to  be  an  exception  to 
the  rule  that  parol  evidence  is  not  admissible  to  vary  the 
terms  of  a  written  contract,  but  it  is  not  so  held.  It  is  said 
not  to  vary  the  terms  of  the  contract,  but  to  bring  in  a  new 
party  whom  the  law  holds  bound  by  it  by  reason  of  his 
relation  to  the  party  in  whose  name  it  is  executed  for  his 
benefit.  In  such  a  case  the  principal  may  either  sue  or  be 
sued.  But  a  plaintiff  can  not  sue  both ;  he  must  make  his 
election.  If,  however,  the  principal  be  disclosed,  and  the 
face  of  the  writing  shows  that  the  agent  is  bound,  it  is  pre- 
sumed that  the  other  party  has  elected  in  the  contract  itself 


142  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

to  look  to  the  agent,  and  the  principal  is  not  liable  upon 
it. 

Chandler  v.  Cox,  54  N.  H.  561,  was  a  case  in  which 
the  principals  were  sued  upon  a  contract  which  was  signed 
by  their  agent  but  which  did  not  upon  its  face  disclose  the 
agency.  It  was,  however,  a  question  of  fact  whether  or 
not  the  principals  were  known  to  be  such  at  the  time  the 
contract  was  executed.  The  Court  in  an  able  and  elaborate 
opinion,  which  reviews  all  the  authorities,  hold  that  if  the 
principals  were  not  known  when  the  agreement  was  signed 
parol  evidence  was  admissible  to  show  the  agency  of  the 
signer  and  to  charge  the  principal;  but  that  if  in  point  of 
fact  agency  was  then  disclosed,  such  evidence  tended  to 
vary  the  writing  and  could  not  be  admitted.  The  ground 
of  the  ruling  upon  the  latter  point  was  that  if  the  plaintiff 
knew  when  the  contract  was  entered  into  that  it  was  made 
for  the  benefit  of  third  parties  the  writing  showed  that  they 
had  elected  to  look  to  the  agent  for  its  performance,  and 
parol  evidence  was  not  admissible  to  vary  the  writing  by 
showing  that  they  did  not  so  elect.  The  contract  now  be- 
fore us  presents  a  different  case,  but  we  think  a  stronger 
one  for  the  defendant.  As  to  the  legal  effect  of  this  contract 
upon  its  face  there  can  be  no  doubt.  It  discloses  the  names 
and  relation  of  all  the  parties  connected  with  it.  It  binds 
Fry,  the  principal,  and  does  not  bind  Heffron,  the  agent. 
If  it  had  said  in  express  terms  that  Fry  was  bound  by  the 
contract  and  Heffron  not,  the  meaning  in  the  light  of  the 
law  would  not  have  been  more  unmistakable. 

Can  Heffron  be  held  liable  upon  this  written  agree- 
ment? Is  it  permissible  in  order  to  bind  him  to  show  by 
parol  testimony  an  intention  exactly  contrary  to  that  ex- 
pressed on  the  face  of  the  writing,  namely,  that  Heffron 
was  bound  by  it  and  that  Fry  was  not  bound  ?  In  our  opin- 
ion this  can  not  be  done  without  violating  a  cardinal  rule 
of  evidence.  It  is  very  different  from  the  case  of  an  undis- 
closed principal.  The  law  makes  him  responsible  for  the 
act  of  his  agent.    The  act  of  the  agent  made  for  his  benefit 


HEFFRON  z>.  POLLARD  143 

and  within  the  scope  of  the  authority  conferred  by  him  is 
his  act.  In  such  a  case  parol  evidence  may  be  resorted  to  to 
show  that  by  reason  of  a  fact  existing  at  the  time  the  con- 
tract is  made,  not  known  to  one  of  the  parties,  there  is  a 
third  party  for  whose  benefit  it  is  made  who  is  bound  by  it. 
The  relation  of  principal  and  agent  being  unknown  to  one 
of  the  contracting  parties  he  could  not  make  an  election  at 
that  time,  and  it  is  not  to  be  presumed  that  he  intended  to 
look  alone  to  the  agent  should  it  subsequently  appear  that 
the  contract  was  made  for  the  benefit  of  another  who  has 
given  authority  for  its  execution.  The  undisclosed  princi- 
pal may  sue  on  a  contract  made  for  him  in  the  name  of 
his  agent,  and  for  a  similar  reason  he  is  held  liable  to  be 
sued.  But  we  apprehend  that  if  a  contract  in  writing  should 
expressly  declare  that  if  it  should  subsequently  be  disclosed 
that  a  party  signing  had  a  principal  such  principal  should 
not  be  bound  no  evidence  would  be  admitted  to  show  a  lia- 
bility contrary  to  such  express  terms. 

But  there  is  another  point  of  view  from  which  this  case 
must  be  considered.  The  effort  in  the  court  below  was  to 
show  that  the  defendant  assumed  the  name  of  Fry  in  order 
to  make  the  contract  for  his  own  benefit.  We  understand 
the  law  to  be  that  when  a  party  for  the  purpose  of  trans- 
acting business  adopts  an  assumed  name,  whether  it  be  fic- 
titious or  the  name  of  another,  he  is  bound  by  a  contract 
made  in  that  name.  In  Triicman  v.  Loder,  1 1  Adolphus  & 
Ellis,  589,  Lord  Denman  says:  "Parol  evidence  is  always 
necessary  to  show  that  the  party  sued  is  the  person  making 
the  contract  and  bound  by  it.  Whether  he  does  so  in  his 
own  name  or  in  that  of  another  or  in  a  feigned  name,  or 
whether  the  contract  be  signed  by  his  own  hand  or  that  of 
agent,  are  inquiries  not  different  in  their  nature  from  the 
question,  who  is  the  person  who  has  just  ordered  goods  in 
a  shop."  In  that  case  the  principal  had  been  engaged  in 
doing  business  in  the  name  of  his  agent  and  the  contract 
was  signed  by  the  agent  in  his  own  name.  See  also  Mcl- 
Icdgc  V.  Iron  Co.,  59  Mass.  158;  Broivn  v.  Parker,  89  Mass. 


144  LIABILITY  OF  AN  Ux\DISCLOSED  PRINCIPAL 

2)2)7-  In  the  present  case  also  the  name  is  not  a  fictitious 
one.  It  is  the  name  of  a  real  person.  But  the  contract 
purports  to  bind  him  alone,  and  upon  its  face  is  inconsist- 
ent with  the  idea  that  the  defendant  in  signing  it  may  have 
intended  to  use  it  for  his  own  business  name.  His  signa- 
ture as  agent  clearly  negatives  the  conclusion  that  any  such 
construction  was  intended  to  be  put  upon  it.  The  intention 
of  the  parties  to  a  written  contract  must  be  derived  from  the 
writing  itself  when  its  meaning  is  clear.  Can  it  be  said  that 
the  admission  of  parol  evidence  to  show  that  the  contract 
before  us  was  made  for  the  benefit  of  defendant  and  was 
intended  to  bind  him  does  not  violate  this  rule?  We  think 
not.  The  contract  clearly  shows  the  relation  of  all  the 
parties  to  it,  who  was  to  be  bound  and  who  was  not  to  be 
bound,  and  its  legal  effect  can  not  be  varied  by  such  evi- 
dence. 

The  rule  is  further  illustrated  by  the  well  recognized 
rule  that  although  in  case  of  an  undisclosed  principal  the 
plaintiff  may  show  there  was  a  principal  in  order  to  bind 
him,  yet  the  agent  is  not  permitted  to  prove  the  same  fact 
in  order  to  free  himself  from  responsibility.  Such  a  con- 
tract shows  clearly  upon  its  face  that  he  is  bound,  and  the 
law  will  not  permit  him  to  show  the  contrary.  To  this 
there  is  an  apparent  but  not  a  real  exception.  The  agent 
may  show  in  order  to  relieve  himself  from  liability  upon 
an  apparent  written  agreement,  which  if  real  would  bind 
himself  upon  its  face,  that  it  was  agreed  when  it  was  signed 
that  it  should  not  take  effect  as  a  contract,  but  that  the 
real  contract  was  an  unwritten  one,  which  bound  only  his 
principal.  In  other  words  he  may  show  that  the  writing 
was  a  mere  colorable  transaction  and  was  understood  by 
the  parties  to  be  not  a  contract  at  all  and  that  the  real  con- 
tract was  not  in  writing  and  bound  only  his  principal. 
Rogers  v.  Hadlcy,  2  Hurl.  &  Colt,  227.  So  in  this  case 
we  think  that  if  it  were  true  that  the  writing  offered  in 
evidence  was  understood  and  agreed  to  be  a  mere  color- 
able transaction,  intended  to  obscure  defendant's  real  con- 


HEFFRON  '.'.  POLLARD  145 

nection  with  the  contract,  and  if  he  really  purchased  the 
pipe  the  plaintiff  could  have  recovered  upon  the  real  agree- 
ment notwithstanding  the  apparent  contract  entered  into  in 
writing. 

If  the  plaintiff  had  alleged  and  proved  a  want  of  au- 
thority on  the  part  of  the  defendant  to  make  the  contract 
for  Fry,  then  also  he  could  have  maintained  his  action 
against  defendant.  But  even  in  that  case  according  to  what 
appears  to  us  the  better  reason  and  the  weight  of  authority, 
his  action  would  have  been  not  upon  the  contract  itself 
but  upon  the  implied  warranty  or  for  the  deceit.  Bartlett 
V.  Tucker,  104  Mass.  336;  Lander  v.  Castro,  43  Cal.  497; 
Hall  V.  Randall,  29  Cal.  567.  The  defendant  testified  in 
effect  that  he  had  authority  from  Fry  to  make  the  agree- 
ment for  him.  The  testimony  of  plaintiff  is  not  necessarily 
inconsistent  with  the  idea  that  he  did  have  such  authority, 
although  in  signing  the  agreement  he  may  have  acted  for 
himself. 

If  the  contract  had  been  signed  in  the  name  of  Fry 
only  it  would  have  been  proper  to  have  permitted  it  to  be 
read  to  the  jury  upon  proof  that  defendant  signed  it,  that 
the  contract  was  made  for  his  benefit,  and  that  he  assumed 
the  name  of  Fry  as  his  business  name  in  the  transaction. 
But  the  writing  was  inconsistent  with  the  theory  that  Fry's 
name  was  used  as  the  name  of  the  defendant,  and  there- 
fore did  not  establish  the  plaintiff's  case  and  should  have 
been  excluded.  For  the  error  in  admitting  it  the  judg- 
.ment  must  be  reversed. 

'  In  order  for  defendant  to  have  availed  himself  of  the 

illegality  of  the  contract  as  a  defence  he  should  have  pleaded 
it.     (i  Chitty's  Plead.,  16  Am.  ed.,  506.) 

Judgment  reversed  and  the  cause  remanded.^ 


^  On  the  question  of  admitting  parol  evidence  to  charge  the  undis- 
closed principal  where  the  agent  has  signed  as  principal,  see  the  fol- 
lowing : 

"There  is  no  doubt,  that  wliere  such  an  agreement  is  made,  it  is  com- 
petent to  show  that  one  or  both  of  the  contracting  parties  were  agents  for 


146  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

other  persons,  and  acted  as  sucli  agents  in  making  the  contract,  so  as  to 
give  the  benefit  of  the  contract  on  the  one  hand  to,  and  charge  with 
liabihty  on  the  other,  the  unnamed  principals :  and  this,  whether  the 
agreement  be  or  be  not  required  to  be  m  writing  by  the  Statute  of 
Frauds :  and  this  evidence  in  no  way  contradicts  the  written  agreement. 
It  does  not  deny  that  it  is  binding  on  those  whom,  on  the  face  of  it,  [it] 
purports  to  bind ;  but  shows  that  it  also  binds  another,  by  reason  that 
the  act  of  the  agent,  in  signing  the  agreement,  in  pursuance  of  his 
authority,  is  in  law  the  act  of  the  principal."  Park,  B.,  in  Higgins  v. 
Senior,  8  M.  &  W.,  p.  844. 

"The  most  plausible  explanation  which  has  been  attempted  pursues 
the  same  thought  more  clearly.  It  is  said  that  the  principal  is  liable 
'because  he  is  taken  to  have  adopted  the  name  of  the  [agent]  as  his 
own,  for  the  purpose  of  [the]  contract.'  2  Smith's  Leading  Case  (8th 
ed.),  408,  note  to  Thomson  v.  Davenport."  Holmes,  J.,  in  Byington  v. 
Simpson,  134  Mass.,  p,  170. 


BORCHERLING  z:  K.\TZ  147 


BORCHERLING  z'.  KATZ. 
In  the  Court  of  Chancery,  New  Jersey,  1883. 

2~  Nezc  Jersey  Equity  Reports,  150. 

Van  Fleet,  V.  C. : 

This  is  a  novel  case.  The  complainant  seeks  to  hold 
the  defendants  for  the  rent  reserved  by  a  lease  made  by 
him  to  other  persons  than  the  defendants.  The  special 
ground  on  which  he  seeks  to  do  this  is,  that  the  defend- 
ants were  the  real  lessees,  that,  though  the  demise  was  made 
to  other  persons,  they  acted  simply  as  the  agents  of  the 
defendants,  who  were  the  principals  in  the  affair  and  enti- 
tled to  the  benefit  of  the  demise.  The  legal  principle  on 
which  he  rests  his  right  to  relief,  is  that  which  entitles  a 
vendor  who,  having  made  a  sale  to  a  person  whom  he  be- 
lieved at  the  time  to  be  the  principal  in  the  transaction,  is 
afterwards  discovered  to  have  been  the  agent  of  a  third 
person,  to  recover  the  price  of  the  goods  of  the  principal, 
though  he  has  in  the  meantime  debited  the  agent. 

The  following  summary  presents  all  the  important 
facts:  On  the  22d  of  October,  1877,  the  complainant  made 
a  lease,  under  seal,  to  Rudolph  Heller  and  William  Katz, 
partners,  doing  business  under  the  name  of  Heller  &  Katz, 
demising  certain  premises,  situate  on  Mulberry  street,  in 
the  city  of  Newark,  for  a  term  of  two  years  and  five  months 
from  the  1st  day  of  November,  1877,  at  an  annual  rent 
of  $840,  payable  monthly  in  advance.  The  lease  was  ex- 
ecuted by  both  parties.  It  gave  the  lessor  the  right  to  re- 
enter for  the  breach  of  any  covenant  on  the  part  of  the 
lessees.  The  lessees  covenanted  not  to  underlet,  nor  to 
assign  the  lease,  or  any  part  of  their  term,  without  the 
written  consent  of  the  lessor.  On  the  31st  day  of  Octo- 
ber, 1877,  the  defendants,  Bernard  Katz  and  Philip  Katz, 
constituted  and  appointed  Heller  &   Katz  their  attorneys, 


148  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

empowering  them  to  carry  on  and  conduct  the  business  then 
owned  by  the  defendants  in  the  city  of  Newark,  and  to  do 
and  perform  all  and  every  act  and  thing  whatsoever  requi- 
site and  necessary  to  be  done  in  carrying  on  the  business. 
Heller  &'  Katz  took  possession  of  the  demised  premises  soon 
after  the  commencement  of  the  term,  and  continued  to 
occupy  them,  jointly,  until  December,  1878,  when  Heller 
left.  Afterwards  Katz  continued  to  occupy  them  alone 
until  April  ist,  1879,  when  he  left.  At  the  time  the  prem- 
ises were  abandoned  there  was  $220  rent  in  arrear,  which 
the  complainant  attempted  to  collect  by  distress,  but  the 
defendants  claimed  the  property  seized,  and  the  complain- 
ant surrendered  it.  This  claim  by  the  defendants  was,  in 
part  at  least,  false.  They  now  admit  that  most  of  the 
chattels  seized  belonged  to  Heller  &  Katz.  The  complain- 
ant subsequently  brought  an  action  at  law  against  the 
lessees  for  the  rent  in  arrear,  but,  on  discovering  the  power 
of  attorney,  proceeded  no  further.  He  did  not  know  of 
the  existence  of  the  power  of  attorney  until  May,  1879, 
some  time  after  he  had  commenced  his  action  at  law.  For 
the  purpose  of  putting  the  case  in  the  most  favorable  form 
for  the  complainant,  I  shall  assume  that  the  business  car- 
ried on  on  the  demised  premises  was  the  business  of  the 
defendants,  and  that  Heller  &  Katz  were  the  agents  of  the 
defendants  when  the  lease  was  executed,  although  the 
weight  of  the  evidence  shows  both  facts  to  have  been  other- 
wise. 

Some  of  the  complainant's  legal  propositions  are  so 
firmly  established  as  to  be  beyond  dispute.  There  can  be 
no  doubt  that  a  principal  is  bound  by  the  acts  of  his  agent 
within  the  authority  expressly  given  to  the  agent,  and  also 
for  such  acts  as  are  necessary  and  requisite  to  be  done  in 
order  that  the  agent  may  accomplish  the  object  of  his  ap- 
pointment. It  is  also  true,  as  a  general  rule,  that  where  a 
contract  is  made  by  an  agent,  without  disclosing  his  prin- 
cipal, and  the  other  contracting  party  afterwards  discovers 
that  the  person  with  whom  he  dealt  was  not  the  principal, 


BORCHERLING  v.  KATZ  149 

but  that  a  third  person  stood  behind  him  as  the  real  party  in 
interest,  he  may  abandon  his  right  to  look  to  the  agent  per- 
sonally, and  resort  to  the  principal.  And  this  he  may  do 
even  when  the  contract  is  in  writing,  and  is  such  as  is  re- 
quired by  the  statute  of  frauds  to  be  in  writing,  for,  In 
such  case,  parol  evidence,  showing  that  an  additional  party 
is  liable,  in  no  way  contradicts  the  written  instrument.  "It 
does  not  deny  that  it  is  binding  on  those  whom,  on  its  face, 
it  purports  to  bind,  but  shows  that  it  also  binds  another, 
by  reason  that  the  act  of  the  agent,  in  signing  the  agree- 
ment, in  pursuance  of  his  authority,  is,  in  law,  the  act  of 
his  principal."  Higgins  v.  Senior,  8  M.  &  W.  834,  844. 
Parol  evidence  is  admissible  in  such  cases  to  charge  the 
principal,  but  not  to  discharge  the  agent.  2  Smith's  Lead. 
Cas.  226.  But  where  an  agent  makes  a  lease  in  his  own 
name,  and  executes  it  in  his  own  name,  though  the  rent 
is  reserved  to  his  principal,  and  all  the  covenants  purport 
to  be  made  with  his  principal,  the  principal  cannot  main- 
tain an  action  on  it,  for  the  reason  that  on  a  deed  inter 
partes  no  person  can  maintain  an  action  except  a  party  to 
it  Berkeley  v.  Hardy,  5  B.  &  C.  355 ;  Sheldon  v.  Diin- 
lap,  I  Harr.  245. 

The  complainant  puts  his  right  to  relief  against  the 
defendants,  on  these  legal  rules.  He  justifies  his  resort  to 
this  court  in  this  wise :  He  insists  that  by  force  of  the 
legal  rules  just  stated,  his  right  to  hold  the  defendants  for 
the  rent  is  clear,  but  that  he  cannot  maintain  an  action  at 
law  against  them  because  they  are  not  parties  to  the  lease. 
He  says  he  cannot  maintain  an  action  for  use  and  occupa- 
tion, for  the  statute  declares  that  such  action  can  only  be 
maintained  where  the  agreement  for  the  occupation  of  the 
land  is  not  by  deed  (Rev.,  p.  570,  Sec.  3)  ;  he  claims,  there- 
fore, that  his  case  falls  within  that  principle  of  equity  juris- 
prudence which  declares  that  where  there  is  a  right  there 
ought  to  be  a  remedy,  and,  if  the  law  gives  none,  it  ought 
to  be  administered  in  equity.  This  conclusion,  I  think, 
may  be  admitted  to  be  sound,  provided  it  is  found  that  the 


150  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

defendants  are  subject  to  the  legal  principle  on  which  the 
complainant  mainly  rests  his  right  to  relief.  This,  in  my 
judgment,  is  the  test  question  of  the  case. 

Neither  the  researches  of  counsel,  nor  my  own,  have 
resulted  in  the  discovery  of  a  precedent  for  this  action.  I 
think  it  may  safely  be  said  that  no  instance  exists  in  which 
some  other  person  than  the  lessee  named  in  a  lease,  under 
seal,  has  been  held  liable  in  equity  for  the  rent  reserved 
by  the  lease,  on  the  ground  that  he  was  the  undisclosed 
principal  in  the  transaction,  and  liable,  as  such,  by  force 
of  the  rule  which  renders  an  unnamed  and  unknown  ven- 
dee liable  for  the  price  of  goods  purchased  by  him  through 
his  agent.  The  only  case  to  which  my  attention  has  been 
directed,  which  can  be  regarded  as  authority  for  the  com- 
plainant's position,  is  Clavcring  v.  IVestley,  3  P.  Wms.  402. 
There  the  plaintiff  made  a  lease  of  a  coal  mine  to  A  for 
twenty-one  years.  A  then  declared  a  trust  of  the  lease  for 
five  persons.  These  five  persons  entered  into  possession, 
worked  the  mine,  and  took  its  products,  but  some  time 
after,  the  lessee  becoming  insolvent,  and  the  mine  unprofit- 
able, they  abandoned  it.  The  lessor  then  brought  his  bill 
against  the  lessee  and  ccstids  que  trust  to  compel  them  to 
pay  the  rent  in  arrear,  and  also  the  accruing  rent,  insisting 
that  though  the  lease  was  made  to  A,  yet  it  being  declared 
by  him  to  be  in  trust  for  the  five  persons,  as  tenants  in 
common,  it  was  the  same  thing  as  if  it  had  been  made  to 
them  originally.  The  master  of  the  rolls  (Sir  Joseph 
Jekyll)  held  that  the  ccstuis  que  trust  were  not  liable,  and 
dismissed  the  bill.  His  reason  was  this :  That  inasmuch 
as  the  plaintiff  had  chosen  to  let  the  mine  to  A  alone,  and 
to  accept  his  covenant  for  the  rent,  he  should  be  restricted 
to  the  security  he  had  voluntarily  accepted.  Having  ac- 
cepted the  covenant  of  the  lessee,  his  remedies  were  lim- 
ited to  that.  Lord  Talbot,  on  appeal,  reversed  this  decree, 
and  decreed  that  the  lessee  was  primarily  liable,  but  in  case 
the  rent  could  not  be  collected  of  him,  then  that  each  of  the 
five  cestuis  que  trust  should  pay  one-fifth  of  the  rent  in 


BORCHERLING  v.  KATZ  ISl 

arrear,  and  also  that  which  should  afterwards  accrue.  The 
report  of  this  case,  on  appeal,  is  extremely  meagre  and  un- 
satisfactory. The  conclusion  of  the  lord  chancellor  is  simply 
given,  without  more.  No  reasons  are  given,  and  we  have 
not  even  a  hint  of  the  legal  rule  which  it  was  supposed 
the  judgment  of  the  master  of  the  rolls  had  overlooked  or 
disregarded. 

But  this  case  has  since  been  overruled.  It  is  no  longer 
an  authority  in  the  court  which  deceived  it ;  on  the  con- 
trary, its  doctrine  has  been  repudiated.  Lord  Cranworth, 
in  Walters  v.  Northern  Coal  Mining  Co.,  5  De  G.  M.  &  G. 
629,  after  expressing  regret  that  the  grounds  of  Lord  Tal- 
bot's decision  are  not  given,  says:  "If  he  is  to  be  taken  as 
laying  down  a  general  proposition  that  whenever  a  legal 
lessee  is  trustee  for  another,  the  rent  becomes  an  equitable 
debt  from  the  cestui  que  trust,  to  be  recovered  by  bill  in 
this  court,  I  must,  with  all  respect,  say  that  is  a  proposition 
to  which  I  cannot  assent.  I  rest  my  judgment  on  the  ground 
that  no  such  general  principle  exists."  Lord  Cranworth 's 
discussion  of  the  question  on  which  the  decision  here  must 
turn,  is  so  exhaustive  and  unanswerable  that  this  case  may 
be  decided  by  a  single  quotation  from  his  opinion.  He 
says :  "The  rights  of  a  landlord  against  those  who  occupy 
his  land  are  legal  rights,  well  defined  and  understood. 
Where  a  tenant  is  holding  under  a  demise  at  a  stipulated 
rent,  the  landlord  has  his  remedy  by  distress  or  action  of 
debt.  If  the  lessee  assigns  to  another,  the  landlord  has 
against  the  assignee,  so  long  as  he  remains  in  possession, 
the  same  rights  which  he  had  against  the  original  tenant. 
If  instead  of  assigning  his  interest,  the  lessee  creates  a 
tenancy  under  himself,  then  the  original  landlord  may 
either  distrain  on  the  under-tenant,  or  may  bring  his  action 
of  debt  or  covenant,  as  the  case  may  be,  against  the  orig- 
inal lessees.  *  *  *  'pj-ie  object  of  the  present  bill  is 
to  give  to  the  landlord  an  additional  remedy  in  case  the 
legal  lessee  is  a  mere  trustee  for  others,  who  have  in  fact 
occupied  the  lands,  to  enable  the  landlord,  in  such  a  case, 


152  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

to  treat  the  ccstitis  que  trust  as  equitable  debtors  for  the 
amount  of  the  rent.  But  I  can  discover  no  principle  to 
warrant  such  a  proposition.  The  relation  between  the 
owner  of  the  land  and  those  who  occupy  it  is  of  a  purely 
legal  character.  The  circumstance  that  there  is  a  relation 
of  an  equitable  character  subsisting  between  the  lessee  and 
the  actual  occupier  cannot  give  any  equitable  rights  to  one 
who  claims  by  a  title  paramount  both  to  the  trustee  and  the 
cestui  que  trust.  Whatever  be  the  relation  between  the 
lessee  and  the  occupier,  the  landlord's  rights  are  unaffected. 
He  has  his  legal  remedy  by  distress,  or  he  may  bring  his 
action  against  the  lessee."  The  same  doctrine,  substanti- 
ally, was  enforced  by  Lord  Justices  Knight  Bruce  and 
Turner,  in  Cox  v.  Bishop,  8  De  G.  M.  &  G.  815.  An  at- 
tempt was  made  there  to  hold  the  equitable  assignee  of  a 
lease  for  the  rent  which  accrued  during  the  time  he  was  in 
the  actual  possession  and  enjoyment  of  the  demised  prem- 
ises. Lord  Justice  Knight  Bruce  said:  "They  [possession 
and  enjoyment]  do  not,  in  my  judgment,  create  a  contract 
between  the  lessor  and  the  equitable  assignee  which  can 
give  the  former  a  title  to  the  relief  prayed  against  the  lat- 
ter. The  possession  by  itself  would  not,  nor  would  the 
equitable  assignment  by  itself,  have  given  the  lessor  the 
equitable  right  which  he  is  here  asserting  against  the  lessee ; 
neither,  I  think,  can  the  union  of  the  two." 

It  is  quite  impossible  to  distinguish  these  cases  from 
the  one  under  consideration.  They  are,  in  all  material  and 
essential  points,  identical,  and  must  all  be  governed  by  the 
same  general  rules  of  justice.  The  fact  that  the  complain- 
ant has  chosen  to  describe  the  relation  existing  between 
the  defendants  and  the  lessees  in  this  case,  as  principal  and 
agent,  and  that  in  the  cases  just  referred  to  the  relation 
which  existed  between  the  lessees  and  the  persons  sought 
to  be  charged  with  the  rent  was  spoken  of  as  trustee  and 
cestuis  que  trust,  is  without  the  least  significance  in  legal 
estimation.  The  difference  is  in  terms  or  names,  and  not 
in  the  legal  character  of  the  relation.    The  relation,  in  prin- 


BORCHERLIXG  v.  KATZ  153 

ciple  and  substance,  is  the  same,  whether  it  is  described  by 
one  set  of  terms  or  the  other,  and  its  rights  and  obHgations 
are  the  same,  whether  called  by  one  name  or  the  other. 
In  every  instance  in  which  an  agent  takes  title  in  his  own 
name  to  property  purchased  for  his  principal,  he  makes 
himself,  in  equity,  the  trustee  of  his  principal.  And  if, 
in  the  transaction  under  consideration.  Heller  &  Katz  were 
the  agents  of  the  defendants,  then  in  taking  the  lease  in 
their  own  names  they  made  themselves  the  trustees  of  the 
defendants,  and  the  more  accurate  description  of  the  rela- 
tion of  the  parties,  in  that  case,  would  be  trustee  and  cestui 
que  trust,  rather  than  principal  and  agent. 

The  precedents  are  against  the  complainant.  I  think 
reason  is  also  against  him.  No  reason  of  justice  or  policy 
can  be  suggested  why  landlords  should  have  the  additional 
remedy  sought  in  this  case.  A  creditor  of  that  kind  is 
already  highly  favored  by  the  law.  He  may  distrain  either 
against  the  tenant  or  the  under-tenant;  if  the  person  in 
possession  fails  or  refuses  to  pay  the  rent  in  arrear,  the 
landlord  may  dispossess  him,  and  thus  recover  the  posses- 
sion of  the  premises,  and  in  addition,  he  may  use  the  only 
means  within  the  reach  of  ordinary  creditors — bring  his 
action  at  law.  li  with  these  ample  remedies  at  his  com- 
mand he  fails  to  secure  the  payment  of  his  rent,  it  may  be 
safely  concluded  it  is  not  for  the  want  of  adequate  reme- 
dies. 

The  complainant's  bill  must  be  dismissed,  with  costs. ^ 


^Accord:  Briggs  v.  Partridge,  64  N.  Y.  357,  1876; 

Kiersted  v.  The  Orange  and  Alexander  Railroad  Co.,  69  N.  Y.  343, 
1877. 

Stanger  v.  Warren,  91  Tex.  472,  1898.  (A  statute  in  the  jurisdiction 
provided:  "No  private  seal  or  scroll  shall  be  necessary  to  the 
validity  of  any  contract,  bond  or  conveyance,  whether  respecting  real 
or  personal  property,  *  *  *  nor  shall  the  addition  or  omission  of  a 
seal  or  scroll  in  any  way  affect  the  force  and  effect  of  the  same."  A 
owned  land.  By  an  unsealed  indenture  A  conveyed  land  to  B,  B  in 
words  covenanting  to  pay  purchase  price.  Held,  that  A  could  not 
proceed  against  C,  B's  undisclosed  principal,  because  the  statute  did  not 
change  the  nature  of  a  deed  or  the  effect  of  promises  recited  therein.) 

Compare  the  foUozi'ing  case  in  "which  the  principal  li'as  known  to 
the  plaintiff  at  the  time  of  contract. 


154  LIABILITY  OF  AN  UNDISCLOSED  PRINCIPAL 

Jn  re  International  Contract  Co.  6  Ch.  App.  Cas.  525,  1871.  (A  was 
the  owner  of  two  concessions  granted  by  the  Peruvian  Government.  B 
stated  that  he  wanted  to  buy  for  company.  B  was  managing  director 
of  the  company.  A  consigned  the  concession  to  B  and  B  covenanted 
to  pay  the  price.  The  company  paid  A  a  part  of  the  price.  An  order 
was  made  for  the  winding  up  of  the  company,  and  A  carried  in  a 
claim  on  the  company  for  the  balance  due  on  B's  covenant.  James,  L. 
J. :  "I  am  of  opinion  that  the  appellant's  case  entirely  fails  *  *  *  There 
is  an  assignment  of  property  to  a  trustee,  who  enters  into  covenant 
with  an  assignor.  In  such  a  case  the  assignor  has  no  equity  to  proceed 
against  the  cestui  que  trust.    The  appeal  must  be  dismissed  with  costs.") 


CHAPTER  III. 


LIABILITY  OF  OWNER  OF  PROPERTY 
NOT  USED  IN  BUSINESS. 


SIMPSON  V.  SEAVEY. 
In  the  Supreme  Judicial  Court  of  Maine,  183 i. 

8  Maine  Reports,  138. 

This  was  an  action  on  the  case,  in  which  the  plaintiffs 
alleged  that  they  were  owners  of  a  saw-mill  on  the  East 
Machias  river,  below  a  saw-mill  of  the  defendants ;  and  that 
the  latter,  having  erected  two  lath-mills  within  their  own 
saw-mill,  threw  their  lath-edgings  into  the  river,  which  being 
carried  by  the  current  into  the  plaintiff's  flume,  choked  and 
obstructed  his  gate-way,  and  diverted  the  water  from  his 
mill,  &c. 

Mellen,  C.  J.^  By  inspection  of  the  writ  it  appears 
that  whatever  injury  the  plaintiffs  have  sustained,  has  been 
occasioned  by  the  two  lath-mills,  which  have  been  made 
within  the  frame  of  the  saw-mill  Unity,  and  by  the  throwing 
of  lath-edgings  from  them  into  the  river,  which  floated  down 
and  obstructed  the  plaintiff's  saw-mill.  By  the  reported 
statement  of  facts  it  appears  that  Dickenson  was  a  part 
owner  of  the  saw-mill  Unity,  during  the  time  mentioned  in 
the  will ;  yet  there  is  no  proof  that  he  owned  any  part  of 
either  of  the  lath-mills  above  mentioned ;  but  it  does  appear 
that,  during  the  said  period,  Dickenson  occupied  no  part  of 
said  lath-mills ;  but  one  was  wholly  owned  and  occupied  and 


^  Only  that  part  of  the  opinion  which  relates  to  the  liability  of  the 
defendant  Dickenson  is  printed. 

(155) 


156  PROPERTY   NOT   USED   IN   BUSINESS 

improved  by  Pope,  Talbot  and  Seavey,  three  of  the  defend- 
ants; and  the  other  was  built  and  owned  by  the  deceased 
Hovey.  On  these  facts,  we  see  no  privity,  in  respect  to  the 
lath-mill,  between  Dickenson  and  the  other  three  surviv- 
ing defendants,  which  can  implicate  him  in  the  transactions 
complained  of  by  the  plaintiffs,  and  subject  him  to  damages; 
of  course  he  is  considered  by  the  court  as  not  guilty,  and 
judgment  is  to  be  entered  in  his  favor  for  his  legal  costs. 


BROOKS  z;.   HARRIS  157 


BROOKS  v.  HARRIS. 
In  the  Supreme  Court  of  Alabama^  1847. 

12  Alabama  Reports,  555. 

Assumpsit  by  Charles  A.  Kelly,  against  the  plaintiffs  in 
error,  on  the  following  instrument:  "Mobile,  11  Oct.  1841. 
Due  Charles  A.  Kelly,  or  bearer,  three  hundred  and  thirty 
dollars,  29-100,  for  work  and  labor  done,  on  steamboat 
'Jewess.' 

(Signed)  for  steamboat  'Jewess',  and  owners. 

Alphonso  Brooks." 

Upon  which  the  following  declaration  was  filed : 

Charles  A.  Kelly,  &c.,  complains  of  Alphonso  Brooks, 
and  Levin  J.  Wilson,  joint  owners  of  the  steamboat  called 
the  "Jewess,"  in  custody,  ficc.  For  that,  &c.,  on  the  irth 
October,  1841,  the  said  defendant,  Alphonso  Brooks,  for 
himself  and  the  said  Levin  J.  \\^ilson,  joint  owners  of  the 
said  steamboat,  made  his  certain  due  bill  in  writing,  bearing 
date,  &c. ;  and  thereby,  and  then  and  there,  for  himself  and 
the  said  Wilson,  as  owners  of  the  said  steamboat,  promised 
to  pay  the  said  plaintiff,  the  said  sum  of  $330.29.  By  means 
whereof,  &c.    There  was  also  a  count  for  work  and  labor. 

A  judgment  was  rendered  in  favor  of  the  plaintiff  on 
the  verdict  of  a  jury. 

A  bill  of  exceptions  found  in  the  record,  discloses,  that 
the  plaintiff  offered  evidence,  tending  to  prove,  that  Wilson 
was  an  owner  of  the  steamboat,  prior  to  the  date  of  the  due 
bill,  and  the  defendant,  Wilson,  having  offered  no  evidence, 
except  such  as  tended  to  show  he  was  not  a  joint  owner  of 
the  boat,  the  court  charged  the  jury,  that  defendants  being 
sued  on  a  due  bill,  expressly  made  the  foundation  of  the 
action,  without  a  plea  denying  under  oath  the  instrument 
declared  on,  it  is  evidence  of  the  debt  it  expresses.     And  if 


158  PROPERTY   NOT   USED   IN   BUSINESS 

there  was  sufficient  proof,  that  Wilson  was  part  owner,  at 
the  time  the  due  bill  was  given,  this,  with  the  due  bill,  will 
bind  him  upon  the  pleadings.^ 

Ormond^  J. :  The  due  bill  upon  which  the  action  is 
founded,  was  not  executed  by  the  defendant,  Wilson,  in  per- 
son, and  to  bring  it  within  the  influence  of  the  statute,  mak- 
ing the  instrument  sued  on,  evidence  of  the  debt,  or  duty, 
for  which  it  was  given,  unless  its  execution  is  denied  by  a 
sworn  plea,  it  must  be  alledged  in  the  declaration,  to  have 
been  executed  by  one,  having  authority  to  bind  him.  This 
is  supposed  to  be  the  effect  of  the  allegation  here,  but  in  our 
opinion  no  such  effect  can  be  accorded  to  it.  It  deduces  the 
right  of  Brooks,  to  bind  Wilson,  from  the  fact  that  Wilson 
is  a  part  owner  with  Brooks  of  the  steamboat.  The  language 
of  the  declaration,  is,  that  the  due  bill  was  made  by  Brooks, 
acting  for  himself,  and  as  joint  owner  with  Wilson,  of  the 
boat.  But  one  part  owner  has  not  the  power  to  charge  an- 
other, by  contracting  debts  in  his  name,  and  there  is  no  al- 
legation, that  Brooks  had  authority,  as  agent  of  Wilson,  to 
bind  him  by  the  execution  of  a  note  in  his  name.  In  Childress 
V.  Miller,  4  Ala.  Rep.  447,  an  attempt  was  made  to  charge 
the  owners  of  a  steamboat,  on  a  due  bill  made  by  the  clerk 
of  the  boat,  "for  steamboat  'Choctaw,'  and  owners."  It  was 
held  that  these  words,  did  not  in  themselves,  import  an  au- 
thority to  bind  the  owners,  and  that  as  the  clerk  of  the  boat 
as  such,  had  not  the  right  to  admit  an  indebtedness  on  the 
part  of  the  owners,  the  action  could  not  be  maintained.  This 
is  a  decision  expressly  in  point,  as  the  statute  applies  only  to 
such  instruments,  as  are  the  foundation  of  the  action;  and 
this  not  being  signed  by  the  party  sought  to  be  charged,  could 
only  be  obligatory  on  him,  by  being  executed  in  his  name, 
by  one  duly  authorized  to  bind  him. 

Let  the  judgment  be  reversed  and  the  cause  remanded.- 


'  Only  so  much  of  the  facts  and  opinion  as  relates  to  the  correctness 
of  this  charge  is  printed. 

'Compare:    Merrill  v.  Berkshire,  11  Pick.  269,  1831.    (A  and  B  were 
tenants  in  common.     Part  of  the  land  was  taken  by  the  county  for  a 


BROOKS   v.   HARRIS  159 

highway  and  allowances  made  by  the  commissioners.  B  signified  his 
assent  to  what  the  commissioners  had  done.  Held,  that  B's  assent  did 
not  estop  A  from  petitioning  for  a  jury  to  make  alterations  in  the  loca- 
tion of  the  highway,  and  to  increase  the  allowances  made  by  the  com- 
missioners.) 

Pearis  v.  Covilland,  6  Cal.  617,  1855.  (A,  B  et  al.  were  tenants  in 
common.  They  made  a  joint  contract  for  the  sale  of  land  to  D,  D 
giving  his  note.  On  the  maturity  of  the  note  payment  was  demanded 
and  refused.  More  than  three  years  later  D  tendered  the  amount  of 
the  note  to  A  and  demanded  deed.  A  refused.  D  made  the  same  tender 
to  B.  B  accepted  the  money  and  gave  D  a  memorandum  reciting  that 
he,  D,  was  entitled  to  a  deed.  D  brought  a  bill  for  specific  perform- 
ance against  A,  B  ct  al.  Refused,  except  as  to  B's  interest,  one  of  the 
grounds  of  the  refusal  being  that  D  had  no  power  to  accept  the  purchase 
money  and  promise  a  deed  so  as  to  bind  the  other  owners  of  the 
property.) 

Thurston  v.  Horton,  82  Mass.  274.  i860.  (C  ordered  an  engine  from 
A,  which  was  to  be  erected  on  land  which  A  thought  belonged  to  C,  but 
which  in  fact  was  the  property  of  B.  When  the  engine  was  being  in- 
stalled B  stood  by  and  said  it  was  satisfactory.  A  sued  B  and  C  for  the 
price  of  the  engine.  Hoar,  J.,  instructed  the  jury,  that  the  above  recited 
facts  were  not  sufficient  to  maintain  an  action  ap-ainst  B.  On  appeal 
affirmed.) 

St.  Paul's  Church  v.  Ford,  34  Barb.  16,  i860.  (A,  B  and  C  were 
tenants  in  common  of  a  pew,  and  jointly  and  severally  liable  to  pay 
'  rent.  Each  separately  and  at  different  times  signed  a  paper  agreeing  to 
a  readjustment  of  the  rent.  The  church  readjusted  the  rent,  and  sued 
A,  B  and  C  jointly  for  the  increased  rent.  Held,  the  defendants  were 
not  jointly  liable  from  the  mere  fact  of  their  co-ownership,  as  each  had 
merely  agreed  separately  to  an  increased  assessment  on  his  undivide  1 
share.) 

Morrison  v.  Clark,  89  Me.  103,  1896.  (A  and  B  were  tenants  in 
common  of  a  reasonable  and  convenient  way  across  Cs  lot.  A  adopted 
and  used  a  right  of  way  on  the  east  side  of  Cs  lot.  C  brought  an  action 
of  trespass  against  A,  and  had  judgment,  on  the  ground  that  A  had 
agreed  to  use  a  way  on  the  west  side  of  Cs  lot.  A  used  the  way  on  the 
east  side  again.  C  sued  A  again  in  trespass.  A  justified  as  licensee  of 
his  wife,  B.  Held,  that  the  former  judgment  against  A  was  not  con- 
clusive against  him  in  this  case,  as  B  had  a  right  to  the  determination 
of  a  jury  of  the  question  whether  the  eastern  way  was  or  was  not  a 
reasonable  way.) 


160  PROPERTY   NOT   USED   IN   BUSINESS 


MARSH  V.  HAND. 
In  the  Supreme  Court  of  New  York,   1886. 

40  Hun's  Reports,  339. 

Appeal  from  a  judgment  in  favor  of  the  plaintiff,  en- 
tered at  the  Broome  Circuit  upon  the  verdict  of  a  jury,  and 
from  an  order  denying  a  motion  for  a  new  trial  made  upon  a 
case  and  exception. 

The  plaintiff,  in  April,  1884,  resided  in  the  town  of 
Binghamton,  upon  a  farm  adjoining  premises  occupied  by 
the  defendant  Cumber,  which  last  mentioned  premises  were 
owned  by  one  Stephen  D.  Hand  at  the  time  of  his  death, 
and  were  occupied  by  said  Cumber,  under  an  agreement 
with  the  defendants  Walter  M.  Hand  and  George  F.  Hand, 
as  executors  of  the  last  will  and  testament  of  said  Stephen 
D.  Hand.  The  defendant  Cumber  took  possession  of  the 
premises  April  3,  1882,  and  continued  in  possession  under 
extensions  of  the  same  contract  up  to  the  time  of  the  trial. 
The  defendants  Hand  left  a  quantity  of  stock  on  the  farm 
at  the  time  that  Cumber  took  possession;  and  some  months 
after,  and  in  November,  1882,  Cumber  exchanged  the  ram 
upon  the  place  for  another,  which  exchange  was  made  with- 
out the  knowledge  of  the  Hands,  nor  did  they  ever  know  of 
such  exchange,  or  that  the  ram  was  on  the  place,  until  after 
the  injuries  complained  of  by  the  plaintiff. 

April  I,  1884,  this  ram  went  upon  the  premises  of 
plaintiff,  and  while  upon  his  premises  butted  plaintiff  and 
inflicted  injuries  upon  him,  and  this  action  was  brought  to 
recover  for  the  injuries  so  received. 

It  is  conceded,  for  the  purposes  of  this  appeal,  that  the 
defendant  Cumber  knew  the  ram  in  question  to  be  vicious, 
and  that  the  other  defendants  did  not  know  it. 

Boardman,  J. :  The  plaintiff  recovered  for  injuries  in- 


MARSH  V.   HAND  161 

iiicted  upon  him  by  a  vicious  ram,  which  had  trespassed  upon 
Lis  premises  from  lands  owned  by  defendants  Hand,  but  oc- 
cupied by  defendant  Cumber  under  a  pecuhar  contract.  It 
is  conceded  that  Cumber  knew  the  ram  was  vicious  and  that 
the  defendants  who  appeal,  the  Hands,  had  no  such  knowl- 
edge prior  to  plaintiff's  injury,  unless  Cumber's  knowledge 
is  to  be  imputed  to  them.  We  will  refer  to  the  contract  set 
out  in  the  case  for  the  language  used,  without  repeating  the 
same  here. 

The  learned  justice  at  Special  Term  holds,  that  the 
Hands,  by  virtue  of  the  contract,  remain  the  owners  of  the 
sheep  left  on  the  place  when  Cumber  took  it — that  it  was  not 
a  sale  of  the  sheep  to  Cumber.  We  are  inclined  to  accept 
that  as  a  just  conclusion,  though  there  are  features  in  the 
contract  leading  to  a  different  result,  notably  where  it  pro- 
vides that  Cumber  "shall  leave  upon  the  farm  as  large  a 
quantity  of  hay  and  stock,  and  as  good  as  he  found  on  taking 
possession,  or  pay  the  Hands  the  cash  value  of  the  same." 
This  language  indicates  an  absolute  right  of  disposition  of 
the  stock  and  but  for  other  clauses  of  the  contract  we  should 
so  hold.  However  that  may  be.  Cumber  exchanged  the  ram 
left  on  the  place  by  the  Hands,  without  their  knowledge 
and  consent,  for  the  vicious  ram  which  did  the  injury.  So 
far  as  appears  the  Hands  never  knew  of  such  exchange  prior 
to  plaintiff's  injury. 

li  the  title  to  the  sheep  remained  in  the  Hands  after 
Cumber  went  into  the  possession  of  the  farm,  it  has  not  been 
divested  by  Cumber's  act  in  making  the  exchange.  The  con- 
tract does  not  give  Cumber  any  right  to  sell  or  convert  the 
property  of  the  Hands  and  they  have  never  authorized  or 
ratified  Cumber's  act.  Cumber  may  be  liable  under  the  final 
clause  of  the  contract  above  quoted  for  the  value  of  the  ram 
disposed  of,  unless  he  substitutes  therefor  something  of  equal 
value,  which  the  Hands  choose  to  accept  as  equally  good. 
Until  the  end  of  the  contract  and  such  acceptance  the  vicious 
ram  so  acquired  remained  the  property  of  Cumber.  He 
kept  it  on  the  farm  in  and  for  the  joint  benefit  and  interest 


162  PROPERTY   NOT   USED   IN   BUSINESS 

of  the  defendants.  It  was  there  for  use,  and  though  owned 
by  Cumber,  the  defendants  without  knowing  it  had  an  in- 
terest in  it  and  in  its  being  kept  there.  It  was  not  kept  on  the 
fami  at  the  expense  of  the  farm  for  the  benefit  of  Cumber 
or  others,  but  for  their  joint  benefit.  If  this  view  of  the  case 
be  correct,  the  defendants  Hand  were  not  the  owners  or 
possessors  of  this  vicious  ram  and  were  not  responsible  for 
injuries  done  by  him  through  Cumber's  neghgence. 

If  it  could  be  held  that  the  defendants  were  tenants  in 
common  of  the  vicious  ram,  it  seems  to  us  that  the  Hands 
could  not  be  held  responsible  for  the  negligence  of  Cumber 
who  was  in  the  sole  possession,  and  had  the  right  to  such 
possession  until  the  end  of  his  year.  {Bozvman  v.  Travis,  54 
N.  Y.,  640.) 

The  cases  cited  by  the  learned  judge  in  his  opinion  deny- 
ing a  new  trial  do  not  seem  to  sustain  his  views  in  their  ap- 
plication to  the  facts  in  this  case.  The  case  of  Ward  v. 
Warren  (82  N.  Y.,  265),  holds  that  the  knowledge  of  one 
tenant  in  common  in  the  occupation  of  land,  of  the  use  of 
an  easement  over  it,  is  knowledge  in  and  will  bind  all  his 
co-tenants.  In  Lcggett  v.  Hyde  (58  N.  Y.,  2^2),  on  the 
facts  one  was  held  to  be  a  partner  and  liable  for  co-partner- 
ship debts.  In  Roberts  v.  Johnson  (58  N.  Y.,  613),  the 
employer  was  held  liable  for  the  negligence  of  his  employee, 
a  stage  driver,  whereby  a  passenger  was  injured.  In  Stroher 
V.  EI  ting  (97  N.  Y.,  102),  the  parties  had  a  contract  rela- 
tion making  in  the  process  of  its  execution  each  the  agent 
of  the  other,  and  each  liable  for  the  negligence  of  the  other 
while  engaged  in  the  common  enterprise.  In  Champion  v, 
Bostwick  (18  Wend.,  175),  the  defendants  were  held  to 
be  co-partners  and  liable  as  such  for  negligent  injury.  Ex- 
cept the  first  case,  which  does  not  apply  to  a  cause  of  ac- 
tion arising  out  of  negligence,  none  of  them  lays  down  any 
rule  of  law  about  tenants  in  common. 

It  is  not  possible  to  hold  that  the  defendants  were  part- 
ners in  the  ownership  of  the  original  sheep  or  the  vicious 
one.     It  was  not  so  held  in  the  court  below.     Nor  can  we 


I^IARSH  V.  HAND  163 

see  how  there  could  be  an  agency  to  do  a  wrong,  or,  by 
neghgence  of  the  agent,  permit  a  wrong  to  be  done  for  which 
his  principal  should  be  bound,  where  the  agent  was  not  at 
the  time  engaged  in  the  prosecution  of  his  principal's  busi- 
ness. Undoubtedly  the  act  of  an  agent  within  the  sco'pe 
of  his  authority,  and  while  engaged  in  his  principal's  busi- 
ness, would  bind  the  principal  and  make  him  liable  for  re- 
sults. (Rounds  V.  Dei,  Lack,  and  West.  R.  R.  Co.,  64  N. 
Y.,  129.)  But  in  no  such  sense  was  Cumber  the  agent  of 
the  Hands.  He  had,  during  the  existence  of  the  contract, 
the  absolute  control  and  possession  of  the  stock.  The  Hands 
could  not  deprive  him  of  it.  They  had  no  power  to  avoid 
the  contract  or  disturb  Cumber's  possession.  How  could 
he  then  be  deemed  their  agent,  or  why  should  they  be  liable 
for  his  negligence  or  wrong?  How  are  his  acts  to  be 
deemed  the  acts  of  the  Hands  to  the  extent  of  making  them 
liable  for  his  wrong,  or  imputing  to  them  his  knowledge 
so  as  to  make  them  liable  for  the  wrong?  (Van  Slyck  v. 
Sncll,  6  Lans.,  299;  King  v.  N.  Y.  C.  and  H.  R.  R.  R.  Co., 
66  N.  Y.,  181.)  For  these  reasons  we  think  the  Hands 
were  not  liable  to  the  plaintiff  for  the  injury  he  suffered. 

I  do  not  find  in  the  case  any  evidence  that  the  sheep 
were  wrongfully  upon  the  plaintiff's  farm  by  reason  of  any 
negligence  of  the  defendants  or  either  of  them.  Unless  the 
sheep  were  unlawfully  there  a  recovery  cannot  be  sustained 
against  the  defendants  Hand  without  proof  of  a  scienter. 
{Van  Leuven  v.  Lykc,  i  Comst.,  515;  Moak  Underbill  on 
Torts,  303.)  We  do  not  think  that  any  such  evidence  has 
been  given  or  that  the  Hands  are  made  liable  by  reason  of 
any  knowledge  possessed  by  Cumber.  Little  importance, 
however,  is  attached  to  this  feature  of  the  case,  since  it  seems 
to  have  been  assumed  during  the  trial  that  the  sheep  were 
trespassing  on  plaintiff's  farm  at  the  time  of  the  injury, 
and  no  such  specific  objection  was  taken  to  the  recovery. 
The  right  of  Cumber  to  make  the  exchange  of  rams  is  denied 
by  the  second  ground  taken  on  the  motion  for  nonsuit. 


164  PROPERTY   NOT  USED   IN   BUSINESS 

The  judgment  and  order  should  be  reversed,  and  a  new 
trial  granted,  with  costs  to  abide  the  event. 

Hardin,  P.  J.,  and  Follett^  J.,  concurred. 

Judgment  and  order  reversed,  and  a  new  trial  ordered, 
with  costs  to  abide  the  event. 


^Compare:  Bernard  v.  Aaron,  ii  C.  B.,  n.  s.  889,  1862.  (B  and  C 
were  joint  owners  of  a  ship.  C  rented  B's  share  in  ship  for  one-third 
gross  profits.  A  was  injured  by  a  defect  in  some  tackle  on  the  ship. 
A  sued  B  and  C  for  the  injury  and  obtained  a  verdict.  Rule  to  set  aside 
verdict  as  to  C  made  absolute.  Williams,  J. :  "It  is  not  disputed,  that  if 
the  facts  be  taken  to  be  that  [C]  hired  [B's]  share  of  the  ship,  at  a  rent 
of  one-third  of  its  gross  earnings,  [B]  is,  in  that  case,  not  liable  for  the 
negligence  of  the  master,  who,  under  these  circumstances,  is  exclusively 
the  servant  of  Aaron.") 


HEETER  V.  LYON  165 


HEETER  r.  LYON. 
In  the  Superior  Court  of  Pennsylvania,   1897. 

5  Pennsylvania  Superior  Court  Reports,  260. 

Assumpsit  to  recover  price  of  the  drilling  of  a  well. 
Before  Greer,  P.  J. 

The  facts  sufficiently  appear  in  the  opinion  of  the 
Court. 

Verdict  for  plaintiff  for  $217.14.     Defendant  appealed. 

Errors  assigned  were:  (i)  In  answering  the  defend- 
ant's first  point,  which  point  and  answer  are  as  follows : 
"Plaintiff  having  entered  into  a  written  contract  with  all  the 
joint  owners  in  the  lease  except  defendant  for  a  specific 
sum,  he  cannot  maintain  the  suit  against  the  defendant  for 
a  pro  rata  share  of  the  expenses  or  contract  price  as  laid 
in  the  original  contract,  it  not  being  divisible.  Answer :  Re- 
fused." (2)  In  answering  the  defendant's  second  point, 
which  point  and  answer  are  as  follows :  "2.  Plaintiff  in  this 
action  being  a  joint  owner  or  tenant  in  common  with  de- 
fendant, cannot  maintain  assumpsit  without  an  express  con- 
tract. Answer :  Affirmed.  The  plaintiff  cannot  recover 
without  a  contract;  this  is  fully  explained  in  the  general 
charge."  (3)  In  answering  the  defendant's  third  point, 
which  point  and  answer  are  as  follows:  "3.  From  all  the 
evidence  in  this  case  the  verdict  should  be  for  the  defend- 
ant.    Answer:  Refused."  ^ 

Orlady,  J. :  The  defendant  in  this  case  was  the  owner 
of  an  undivided  one-eighth  interest  in  a  leasehold  for  oil  and 
gas  purposes  in  Butler  county.  In  the  improvement  of  the 
property,  it  was  agreed  by  all  interested  therein  save  the  de- 
fendant (and  plaintiff  contends  with  him  also),  that  a  new 
well  should  be  drilled  on  the  premises,  the  cost  of  which 


*The  argument  of  counsel  for  appellant  is  omitted. 


166  PROPERTY   NOT  USED   IX   BUSINESS 

was  to  be  $2,600.  This  sum  was  to  be  paid  to  the  plaintiff 
by  the  owners,  in  proportion  to  their  respective  interests. 
All  of  the  owners,  save  the  defendant,  went  on  the  ground 
and  fixed  the  location  of  the  new  well  and  directed  the 
manner  in  which  it  was  to  be  drilled.  The  plaintiff  con- 
tends that  the  matter  was  subsequently  brought  to  the  at- 
tention of  the  defendant,  who  ratified  the  contract,  and 
agreed  to  pay  his  share  of  the  $2,600,  and  on  the  faith  of 
this  promise,  the  work  was  done  in  a  manner  to  which  there 
was  no  objection,  and  the  plaintiff  brings  this  action  to  re- 
cover from  the  defendant  his  proportionate  share  of  the 
cost.  The  whole  question  was  one  of  fact,  and  the  right  of 
one  joint  tenant  or  tenant  in  common  to  recover  in  as- 
sumpsit, for  property  improvement  without  an  express  con- 
tract from  one  equally  interested,  does  not  apply  in  this  case. 
It  was  not  contended  that  the  work  was  done  improperly. 
The  defendant  denied  authorizing  it.  The  plaintiff  as- 
serted that  he  had  full  authority  from  him  to  do  the  work, 
and  while  the  others  signed  a  written  contract,  it  was  at 
a  time  when  the  work  was  nearly  completed,  and  the  de- 
fendant's objection  to  signing  the  writing,  was  only  be- 
cause he  was  not  satisfied  with  the  location  adopted  by  the 
others  interested  in  the  title. 

The  question  was  fairly  submitted  to  the  jury,  who 
were  told  "if  there  was  no  agreement  or  consent  of  Mr. 
Lyon  with  Mr.  Heeter,  so  to  drill  this  well,  then  the  verdict 
must  be  for  the  defendant,  because  the  majority  consenting 
to  it  would  not  bind  him ;  but  if  the  well  was  drilled,  which 
is  admitted,  and  if  its  drilling  would  have  benefited  Mr. 
Lyon  and  it  is  admtited  it  would  have,  then  if  Mr.  Lyon 
consented  to  its  drilling,  etc.,  joining  in  with  the  others  al- 
though not  in  writing,  then  he  would  be  liable  to  pay  his 
share,  whatever  that  share  is  reasonably  worth."  This  was 
a  fair  submission  of  the  only  question  in  controversy,  to  the 
only  tribunal  authorized  to  dispose  of  it. 

The  assignments  of  error  are  overruled  and  the  judg- 
ment is  affirmed. 


CHAPTER   IV. 


LIABILITY    OF   SOLE   OWNER   OF   PROP- 
ERTY USED  IN  BUSINESS. 


EDMUNDS  z:  BUSHELL. 
In  the  Court  of  Queen's  Bench,  1865. 

Lain  Reports,  i  Court  of  Queen's  Bench,  g~. 

This  was  an  action  commenced  under  the  Summary- 
Procedure  on  Bills  of  Exchange  Act,  1855  (18  &  19  Vict., 
c.  67).  The  defendant  Bushell  had  not  appeared,  and 
judgment  had  been  signed  against  him. 

The  declaration  was  against  Jones,  as  acceptor  of  a 
bill  for  184/.,  dated  ist  of  February,  1865,  at  four  months 
after  date,  drawn  by  one  Britten  to  his  order,  and  indorsed 
by  him  to  Taylor,  and  by  Taylor  to  the  Birmingham  and 
Midland  Banking  Company,  of  which  the  plaintiff  was  the 
public  officer. 

Plea,  that  the  defendant  Jones  did  not  accept  the  bill 

The  cause  was  tried  at  the  last  Surrey  Summer  As- 
, sizes,  before  Crompton,  J.,  and  the  following  facts  were 
proved.  The  defendant  Jones  was  a  wholesale  straw  hat 
manufacturer,  who  carried  on  business  at  Luton,  in  Bed- 
fordshire, and  also  until  May,  1865,  had  a  branch  establish- 
ment in  Milk  Street,  London.  The  business  in  London  was 
carried  on  under  the  name  of  "Bushell  &  Co."  By  an 
agreement  between  the  two  defendants  it  was  agreed  that 
Bushell  should  enter  Jones's  service  as  manager  of  the  estab- 
lishment in  London,  and  that  he   should  be  paid  for  his 

services  quarterly  an  amount  equal  to  one-half  of  the  net 

(167) 


168  PROPERTY  USED  IN  BUSINESS— SOLE  OWNERSHIP 

profit  to  be  derived  from  the  business  carried  on  in  Lon- 
don. Jones  opened  an  account  in  the  name  of  "Bushell 
&  Co.,"  at  the  London  and  County  Bank,  into  which  ac- 
count Bushell  was  to  pay  all  sums  which  he  received  to  the 
amount  of  5/.  He  had  authority  from  Jones  to  draw 
cheques  in  the  name  of  Bushell  &  Co.  for  the  purposes  of 
the  business,  but  he  had  no  authority  to  draw  or  accept 
bills.  In  July,  1864,  Bushell  accepted  a  bill  in  the  name 
of  Bushell  &  Co.,  dated  9th  of  April,  1864,  drawn  upon 
Bushell  &  Co.,  and  made  payable  at  the  London  and  County 
Bank.  This  bill  was  paid  at  maturity,  and  Jones  did  not 
know  of  the  transaction  until  he  saw  the  amount  entered  in 
his  pass-book  as  a  payment.  Jones  then  told  Bushell  he  had 
no  authority  to  accept  bills,  and  forbade  him  to  do  so. 
Bushell,  however,  accepted  three  other  bills,  dated  in  No- 
vember and  December,  1864,  which  fell  due  in  February 
and  March  following,  and  were  paid  at  the  London  and 
County  Bank,  and  charged  to  Jones.  These  four  bills 
were  given  to  persons  with  whom  "Bushell  &  Co."  had 
dealings  in  the  way  of  business.  In  consequence  of  these  ir- 
regularities Bushell  was  dismissed  in  May,   1865. 

The  acceptance  to  the  bill  sued  upon  was  in  the  style 
of  "Bushell  &  Co.,"  and  was  proved  to  be  in  the  handwrit- 
ing of  Bushell.  The  bill  was  taken  by  the  banking  com- 
pany from  Taylor,  a  customer,  for  a  good  consideration, 
the  company  knowing  nothing  of  Bushell  &  Co. 

The  jury  found  a  verdict  for  the  plaintiff,  for  185/. 
17,?.,  leave  being  reserved  to  move  to  enter  a  verdict  for 
the  defendant,  if  the  Court  should  be  of  opinion  that  there 
was  no  reasonable  evidence  of  the  defendant  Jones's  lia- 
bility.^ 

CocKBURN,  C.  J.  In  this  case  there  ought  to  be  no 
rule.  The  defendant  carried  on  business  both  at  Luton 
and  in  London.  Li  London  the  business  was  carried  on  in 
the  name  of  Bushell  &  Co.,  Jones  at  the  same  time  employ- 


*  The  argument  of  counsel  for  the  rule  is  omitted. 


EDMUNDS  r.   BUSHELL  169 

ing  Bushell  as  his  manager ;  Bushell  was  therefore  the  agent 
of  the  defendant  Jones,  and  Jones  was  the  principal,  but 
he  held  out  Bushell  as  the  principal  and  owner  of  the  busi- 
ness. That  being  so  the  case  falls  within  the  well-established 
principle,  that  if  a  person  employs  another  as  an  agent  in 
a  character  which  involves  a  particular  authority,  he  can- 
not by  a  secret  reservation  divest  him  of  that  authority.  It 
is  clear,  therefore,  that  Bushell  must  be  taken  to  have  had 
authority  to  do  whatever  was  necessary  as  incidental  to  car- 
rying on  the  business ;  and  to  draw  and  accept  bills  of  ex- 
change is  incidental  to  it,  and  Bushell  cannot  be  divested  of 
the  apparent  authority  as  against  third  persons  by  a  secret 
reservation.  I  think  Jones  was  properly  held  to  be  liable 
on  the  bill.- 

Rule  refused. 


*The  concurring  opinions  of  Mellor  and  Shee,  JJ.,  are  omitted. 


170  PROPERTY  USED  IN  BUSINESS— SOLE  OWNERSHIP 


WATTEAU  V.   FENWICK. 

In  the  Queen's  Bench  Division  of  the  High  Court  of 
Justice,  1893. 

Law  Reports  [1893],  i  Queen's  Bench  Division,  346. 

Appeal  from  the  decision  of  the  county  court  judge 
of  Middlesborough. 

From  the  evidence  it  appeared  that  one  Humble  had 
carried  on  business  at  a  beerhouse  called  the  Victoria  Hotel, 
at  Stockton-on-Tees,  which  business  he  had  transferred 
to  the  defendants,  a  firm  of  brewers,  some  years  before  the 
present  action.  After  the  transfer  of  the  business,  Humble 
remained  as  defendants'  manager;  but  the  license  was  al- 
ways taken  out  in  Humble's  name,  and  his  name  was  painted 
over  the  door.  Under  the  terms  of  the  agreement  made  be- 
tween Humble  and  the  defendants,  the  former  had  no  au- 
thority to  buy  any  goods  for  the  business  except  bottled 
ales  and  mineral  waters;  all  other  goods  required  were  to 
be  supplied  by  the  defendants  themselves.  The  action  was 
brought  to  recover  the  price  of  goods  delivered  at  the 
Victoria  Hotel  over  some  years,  for  which  it  was  admitted 
that  the  plaintiff  gave  credit  to  Humble  only :  they  consisted 
of  cigars,  bovril,  and  other  articles.  The  learned  judge  al- 
lowed the  claim  for  the  cigars  and  bovril  only,  and  gave 
judgment  for  the  plaintiff  for  22/.  12^-.  6d.  The  defendants 
appealed. 

1892.  Nov.  19.  Finlay,  O.  C.  (Scott  Fox,  with  him), 
for  the  defendants.  The  decision  of  the  county  court 
judge  was  wrong.  The  liability  of  a  principal  for  the  acts 
of  his  agent,  done  contrary  to  his  secret  instructions,  de- 
pends upon  his  holding  him  out  as  his  agent — that  is,  upon 
the  agent  being  clothed  with  an  apparent  authority  to  act 
for  his  principal.  Where,  therefore,  a  man  carries  on  busi- 
ness in  his  own  name  through  a  manager,  he  holds  out  his 
own  credit,  and  would  be  liable   for  goods  supplied  even 


WATTEAU    r.    FENWICK  171 

where  the  manager  exceeded  his  authority.  But  where,  as 
in  the  present  case,  there  is  no  holding  out  by  the  principal, 
but  the  business  is  carried  on  in  the  agent's  name  and  the 
goods  are  supplied  on  his  credit,  a  person  wishing  to  go 
behind  the  agent  and  make  the  principal  liable  must  diew 
an  agency  in  fact. 

[Lord  Coleridge,  C.  J.  Cannot  you,  in  such  a  case, 
sue  the  undisclosed  principal  on  discovering  him?] 

Only  where  the  act  done  by  the  agent  is  within  the 
scope  of  his  agency;  not  where  there  has  been  an  excess 
of  authority.  Where  any  one  has  been  held  out  by  the  prin- 
cipal as  his  agent,  there  is  a  contract  with  the  principal  by 
estoppel,  however  much  the  agent  may  have  exceeded  his 
authority;  where  there  has  been  no  holding  out,  proof  must 
be  given  of  an  agency  in  fact  in  order  to  make  the  principal 
liable.  1 

Dec.  12.  Lord  Coleridge,  C.  J-  The  judgment  which 
I  am  about  to  read  has  been  written  by  my  brother  \\^ills, 
and  I  entirely  concur  in  it. 

Wills,  J.  The  plaintiff  sues  the  defendants  for  the 
price  of  cigars  supplied  to  the  Victoria  Hotel,  Stockton- 
upon-Tees.  The  house  was  kept,  not  by  the  defendants,  but 
by  a  person  named  Humble,  whose  name  was  over  the  door. 
The  plaintiff  gave  credit  to  Humble,  and  to  him  alone,  and 
had  never  heard  of  the  defendants.  The  business,  however, 
was  really  the  defendants',  and  they  had  put  Humble  into 
it  to  manage  it  for  them,  and  had  forbidden  him  to  buy 
cigars  on  credit.  The  cigars,  however,  were  such  as  would 
usually  be  supplied  to  and  dealt  in  at  such  an  establishment. 
The  learned  county  court  judge  held  that  the  defendants 
were  liable.     I  am  of  opinion  that  he  was  right. 

There  seems  to  be  less  of  direct  authority  on  the  sub- 
ject than  one  would  expect.  But  I  think  that  the  Lord 
Chief  Justice  during  the  argument  laid  down  the  correct 
principle,  viz.,  once  it  is  established  that  the  defendant  was 


*The  argument  of  council  for  the  plaintiff  is  omitted. 


172  PROPERTY  USED  IN  BUSINESS— SOLE  OWNERSHIP 

the  real  principal,  the  ordinary  doctrine  as  to  principal  and 
agent  applies — that  the  principal  is  liable  for  all  the  acts 
of  the  agent  which  are  within  the  authority  usually  con- 
fided to  an  agent  of  that  character,  notwithstanding  limita- 
tions, as  between  the  principal  and  the  agent,  put  upon 
that  authorit}'.  It  is  said  that  it  is  only  so  where  there  has 
been  a  holding  out  of  authority — which  cannot  be  said  of  a 
case  where  the  person  supplying  the  goods  knew  nothing  of 
the  existence  of  a  principal.  But  I  do  not  think  so.  Other- 
wise, in  every  case  of  undisclosed  principal,  or  at  least  in 
every  case  where  the  fact  of  there  being  a  principal  was  un- 
disclosed, the  secret  limitation  of  authority  would  prevail 
and  defeat  the  action  of  the  person  dealing  with  the  agent 
and  then  discovering  that  he  was  an  agent  and  had  a  prin- 
cipal. 

But  in  the  case  of  a  dormant  partner  it  is  clear  law 
that  no  limitation  of  authority  as  between  the  dormant  and 
active  partner  will  avail  the  dormant  partner  as  to  things 
within  the  ordinary  authority  of  a  partner.  The  law  of 
partnership  is,  on  such  a  question,  nothing  but  a  branch  of 
the  general  law  of  principal  and  agent,  and  it  appears  to 
me  to  be  undisputed  and  conclusive  on  the  point  now  under 
discussion. 

The  principle  laid  down  by  the  Lord  Chief  Justice,  and 
acted  upon  by  the  learned  county  court  judge,  appears  to  be 
identical  with  that  enunciated  in  the  judgments  of  Cock- 
burn,  C.  J.,  and  Mellor,  J.,  in  Edmunds  v.  Bushcll,  the 
circumstances  of  which  case,  though  not  identical  with  those 
of  the  present,  come  very  near  to  them.  There  was  no 
holding  out,  as  the  plaintiff  knew  nothing  of  the  defendant. 
I  appreciate  the  distinction  drawn  by  Mr.  Finlay  in  his  ar- 
gument, but  the  principle  laid  down  in  the  judgments  re- 
ferred to,  if  correct,  abundantly  covers  the  present  case.  I 
cannot  find  that  any  doubt  has  ever  been  expressed  that  it 
is  correct,  and  I  think  it  is  right,  and  that  very  mischievous 
consequences  would  often  result  if  that  principle  were  not 
upheld. 

Appeal  dismissed. 


POPE  z:   DISTILLING   CO.  173 


POPE  V.  MEADOW  SPRING  DISTILLING 
COMPANY. 

In  the  United  States  Circuit  Court  for  the  Eastern 
District  of  Wisconsin^  1884. 

20  Federal  Reporter,  35. 

Dyer^  J.,  (charging  jury.)  These  are  two  actions,  one 
brought  by  Charles  Pope  and  the  other  by  D.  W.  Ryan, 
against  the  Meadow  Spring  Distilhng  Company,  to  recover 
in  the  one  case  the  purchase  price  of  a  certain  quantity  of 
malt,  and  in  the  other  case  the  purchase  price  of  a  quantity 
of  barrels,  which  it  is  alleged  came  to  the  possession  of  the 
defendant  company  through  a  sale  of  the  same,  in  the  first 
instance,  to  one  Leopold  Wirth,  and  of  which  property,  it  is 
alleged,  the  defendant  had  the  use  and  benefit.  The  com- 
plaint in  the  case  of  Pope  charges  that  in  August,  1883, 
Leopold  Wirth,  who  was  the  president  of  the  defendant 
company  ordered  of  the  plaintiff,  who  was  a  maltster  in 
Chicago,  two  car-loads  of  malt  suitable  for  use  in  a  dis- 
tillery, and  the  plaintiff  Pope,  at  the  request  of  Wirth,  ship- 
ped to  him  such  two  car-loads  of  malt  on  the  twenty-eighth 
and  twenty-ninth  days  of  August,  1883 ;  that  the  same  were 
of  the  value  of  $1,255.78;  that  Wirth  made  the  order  and 
request  for  the  malt  for  the  use  and  benefit,  and  with  the 
knowledge  and  on  behalf,  of  the  defendant,  and  for  the 
purpose  of  getting  the  same  into  the  possession  of  the  de- 
fendant ;  that  the  defendant  company  realized  the  whole 
benefit  and'  advantage  of  the  purchase,  and  received  the 
malt  in  pursuance  of  the  shipment  by  the  plaintifT,  and  used 
the  same,  and  became  thereby  indebted  to  the  plaintiff  in  the 
amount  of  the  purchase  price,  $1,255.78.  In  the  case  of 
Ryan,  the  same  state  of  facts  and  grounds  of  alleged  lia- 
bility are  stated,  except  that  the  property  described  consisted 
of  three  carloads  of  barrels,  the  value  and  purchase  price 


174  PROPERTY  USED  IN  BUSINESS— SOLE  OWNERSHIP 

of  which  are  alleged  to  have  been  $775.25,  which  is  the 
amount  sought  to  be  recovered  by  the  plaintiff  Ryan. 

It  is  undisputed  that  the  plaintiffs  in  the  several  actions, 
at  the  time  they  sold  the  property  in  question,  made  the 
sales  on  the  individual  credit  of  Wirth,  and  shipped  the 
property  to  him  as  the  purchaser  and  personal  consignee 
thereof,  and  respectively  received  and  accepted  his  individ- 
ual acceptances  for  the  purchase  price,  which  acceptances 
were  ultimately  not  paid.  It  seems  that  at  the  time  of  these 
transactions  the  IVIeadow  Spring  Distilling  Company  was  a 
corporation  owning  and  operating  a  newly-constructed  dis- 
tillery in  this  city,  of  which  corporation  Leopold  Wirth  was 
the  president,  and  of  which,  in  the  conduct  of  its  business, 
William  Bergenthal  was  the  general  manager.  It  is  claimed 
by  the  plaintiffs,  in  their  respective  cases,  that  immediately 
after  the  arrival  of  the  malt  and  barrels  in  Milwaukee,  the 
same  were  removed  to  the  distillery  of  the  defendant  com- 
pany, and  that  the  defendant  had  the  full  use  and  benefit  of 
the  property  in  its  business.  The  theory  of  the  plaintiffs 
is  that  although  Wirth  negotiated  for  and  ordered  the  malt 
and  barrels  in  question  in  his  own  name  and  on  his  in- 
dividual credit,  he  in  fact  made  the  purchase  for  the  use  and 
benefit  of  the  defendant  company;  that  the  property  was 
purchased  to  be  used  at  the  distillery  of  the  defendant,  and 
on  behalf  and  with  the  knowledge  of  the  company,  and  that 
the  defendant  in  fact  had  the  use  and  received  the  whole 
benefit  of  the  property,  and  therefore  ought  to  pay,  and  in 
law  became  liable  to  pay,  for  the  same.  The  claim  of  the 
defendant  in  both  cases  is  that  the  purchases  were  made  by 
Leopold  Wirth  on  his  own  account,  for  his  own  use,  and  on 
his  sole  credit;  that  the  purchases  were  not  made  by  him 
as  an  agent;  that  he  had  no  authority  so  to  act  for  the 
defendant;  that  the  defendant  company  at  the  time  had  no 
knowledge  of  the  transactions ;  that  the  purchases  were  not 
originally  made  for  its  use  and  benefit ;  that  it  had  no  con- 
nection therewith,  and  did  not  authorize  the  same,  and 
that  subsequently,  after  Wirth  had  become  the  owner  of 


POPE  i:   DISTILLING  CO.  175 

the  property  in  his  own  right,  it  purchased  the  malt  and 
barrels  from  him  as  a  subsequent  and  independent  transac- 
tion, and  paid  him  therefor;  that,  therefore,  it  is  under  no 
liability  to  the  plaintiffs. 

In  submitting  the  cases  to  you,  gentlemen,  the  Court 
will  not  enter  upon  any  discussion  of  the  testimony.  *  *  * 
It  is  the  law  that  where  goods  are  sold  to  a  person  who  is 
in  fact  an  agent  of  another,  and  on  the  credit  of  such  per- 
son, but  without  knowledge  of  the  agency  on  the  part  of 
the  seller,  the  latter  has  the  right  to  make  the  principal  his 
debtor  on  discovering  him ;  and  the  fact  that  he  may  have 
taken  the  note  or  acceptance  of  such  buyer  for  the  goods 
before  discovering  the  principal,  will  not  affect  his  right 
to  pursue  the  real  principal.  So,  too,  if  the  party  making 
the  purchase  in  fact  purchases  the  property,  not  for  himself, 
but  for  the  use  and  benefit  of  a  third  party,  and  if  such 
third  party,  knowing  of  such  purchase,  takes  the  property 
and  appropriates  it  to  his  own  use  and  benefit,  he  is  liable 
for  the  value  thereof  to  the  seller,  although  the  seller  may 
not  have  known,  when  he  made  the  sale,  that  such  third 
party  was  the  real  party  in  interest,  and  may  have  under- 
stood at  the  time  that  he  was  making  the  sale  to  the  party 
with  whom  he  directly  dealt,  and  may  have  made  the  sale 
on  the  credit  of  such  party.  It  is  also  a  principle  of  law  that 
where  the  purchaser  of  goods  upon  credit  is  known  to  the 
seller  to  be  an  agent  of  a  known  principal,  and  the  seller 
with  such  knowledge  gives  exclusive  credit  to  the  agent  by 
taking  his  note  or  acceptance  for  the  goods,  the  agent  alone 
is  responsible  to  the  seller. 

Applying  these  principles  to  this  case,  if  you  should 
find  that  Wirth,  when  he  purchased  the  malt  and  barrels  in 
question,  was  in  fact  the  agent  of  the  defendant  company  in 
making  the  purchase ;  that  he  purchased  the  property  for  the 
defendant,  and  for  its  use  and  benefit ;  and  that  the  plaintiffs 
were  at  the  time  ignorant  of  such  agency, — then,  on  dis- 
covery that  the  defendant  was  the  real  principal  in  the 
transactions,  the  plaintiffs  had  the  right  to  assert  their  claims 


176  PROPERTY  USED  IN  BUSINESS— SOLE  OWNERSHIP 

against  the  defendant,  and,  upon  such  state  of  facts  being 
estabHshed,  they  are  entitled  to  recover  from  the  defend- 
ant the  value  of  the  property  so  sold,  although  they  took 
the  personal  acceptances  of  Wirth  for  the  property.  Or  if 
you  should  find  that,  although  Wirth  had  no  original  au- 
thority to  make  the  purchases,  he  did  in  fact  purchase  the 
malt  and  barrels  for  the  use  and  benefit  of  the  defendant, 
and  on  its  behalf,  and  that  the  defendant  company,  by  its 
president  and  general  manager,  knew  of  such  purchase,  and 
with  this  knowledge  received  the  property,  and  had  the  use 
and  benefit  of  it,  then  the  plaintiffs  are  entitled  to  recover, 
although  they  may  not  have  known,  when  they  made  the 
sales,  that  the  defendant  was  the  real  party  in  interest,  and 
may  have  understood  at  the  time  that  they  were  selling  to 
Wirth,  and,  in  ignorance  of  the  real  party  in  interest,  may 
have  taken  his  acceptances  for  the  property.  But  if  Wirth 
was  the  autorized  agent  of  the  defendant  in  the  purchase  of 
the  property,  and  if  the  plaintiffs  knew  such  to  be  the  fact, 
and  knew  the  ]\Ieadow  Spring  Distilling  Company  to  be  his 
principal,  and  to  be  liable  on  the  purchases,  and  the  prop- 
erty was  sold  on  the  exclusive  credit  of  Wirth,  the  plaintiffs 
electing  to  trust  him  and  not  the  defendant  company,  then 
the  plaintiffs  are  not  entitled  to  recover.  Further,  if  Wirth 
was  not  the  authorized  agent  of  the  defendant,  and  did  not 
purchase  the  malt  and  barrels  for  the  use  and  benefit  of  the 
defendant,  or  on  its  behalf,  but  purchased  them  for  himself, 
in  his  own  individual  right,  and  on  his  own  ac- 
count, then  he  became  the  owner  of  the  property,  and  was 
solely  liable  therefor  to  the  plaintiffs,  and  in  that  event  he 
would  have  the  right  to  sell  the  same  to  the  defendant,  or 
any  other  person;  and  if  you  should  find  such  to  be  the  state 
of  the  case,  your  verdict  should  be  for  the  defendant.^ 
Verdict  for  plaintiffs. 


*  The  Court's  discussion  of  the  evidence  is  omitted. 


CHAPTER    V. 


PARTNER'S     POWER     TO     SUBJECT     HIS 
COPARTNER  TO  LIABILITY. 


SECTION    I.  — LIABILITY  ON   CONTRACT— THE 
CREATION  OF  A  PARTNERSHIP. 


GRACE  c'.  SMITH. 
In  the  Court  of  Common  Pleas,  1776. 

2   William  Blackstoiic's  Reports,  998. 

Assumpsit  for  Goods  sold  and  delivered.  On  Trial 
at  the  Sittings  after  last  Term,  Verdict  for  the  Defendant; 
and  now  Davy  moved  for  a  new  Trial ;  the  Verdict,  as  he 
said,  being  contrary  to  Law  and  Evidence. 

De  Grey  Chief  Justice  reported,  that  this  was  an  Ac- 
tion brought  against  Smith  alone,  as  a  secret  Partner  with 
one  Robinson  [vide  Abbot  and  Smith.  P.  14  Geo.  3.  p.  947. 
devanf]  to  whom  the  Goods  were  delivered,  and  who  be- 
came Bankrupt  in  1770.  That  on  the  30th  of  March  1767, 
Smith  and  Robinson  entered  into  Partnership  for  seven 
Years,  but  in  the  November  afterwards  some  Disputes 
arising,  they  agreed  to  dissolve  the  Partnership.  The  Ar- 
ticles were  not  cancelled ;  but  the  Dissolution  was  open  and 
notorious,  and  was  notified  to  the  Public  on  the  17th  of 
November  1767.  The  Terms  of  the  Dissolution  were,  that 
all  the  Stock  in  Trade  and  Debts  due  to  the  Partnership 
should  be  carried  to  the  Account  of  Robinson  only.  That 
Smith  was  to  have  back  4200/.  which  he  brought  into  the 
Trade,  and  1000/.  for  the  Profits  then  accrued,  since  the 
Commencement  of  the  Partnership:  That  SiiiifJi  was  to 
lend  Robinson  4000/.  part  of  this  5200/,  or  let  it  remain  in 

(177) 


178  PARTNER'S  POWER  TO  BIND  COPARTNER 

his  Hands  for  seven  Years,  at  five  per  Cent.  Interest,  and 
an  Annuity  of  300/^  per  Anmiui,  for  the  same  seven  Years. 
P'or  all  which  Robinson  gave  Bond  to  Smith.  In  June  1768, 
Robinson  advanced  to  Smith  600/.  for  two  Years  Payment 
of  the  Annuity  and  other  Sums  by  way  of  Interest,  and 
Gratuities,  and  other  large  Sums  at  different  Times  to  en- 
able him  to  pay  the  Partnership  Debts,  Smith  having  agreed 
to  receive  all  that  was  due  to  the  Partnership,  and  to  pay 
its  Debts,  but  at  the  Hazard  of  Robinson.  That  on  the  ist 
of  August  1768,  the  Demands  of  Smith  were  all  liquidated 
and  consolidated  into  one — vis.  5200/,  due  to  Him  on  the 
Dissolution  of  the  Partnership  1500/.  for  the  remaining 
five  Years  of  the  Annuity,  and  300/.  for  Smith's  Share  of 
a  Ship :  in  all  7000/.  for  which  Robinson  gave  a  Bond  to 
Smith.  That  on  the  22d  of  August  1769  an  Assignment 
was  made  of  all  Robinson's  Effects  to  secure  the  Balance 
then  due  to  Smith,  which  was  stated  to  be  10,000/.  Soon 
after  the  Commission  was  awarded. 

Davy  for  the  Plaintiff  insisted,  that  the  Agreement  be- 
tween Robinson  and  Smith  was  either  a  secret  Continuance 
of  the  old  Partnership,  or  a  secret  Commencement  of  a 
new  one;  being  for  the  retiring  Partner  to  leave  his  Money 
in  the  visible  Partner's  Hands,  in  order  to  carry  on  his 
Trade ;  and  to  receive  for  it  twelve  and  an  half  per  Cent. 
Profit,  which  could  not  be  fairly  done,  unless  it  be  under- 
stood to  arise  from  the  Profits  of  the  Trade.  And  that  he 
ought  therefore  to  be  considered  as  a  secret  Partner.  And 
he  relied  much  on  a  Cafe  of  Bloxham  and  Fourdrinier 
against  Pell  and  Brooke,  tried  at  the  same  Sittings  (7th  of 
March  1775)  before  Lord  Mansfield  in  the  King's  Bench 
as  in  point.  "This  was  also  a  Partnership  for  seven  Years 
between  Brooke  and  Pell;  but  at  the  End  of  one  Year 
agreed  to  be  dissolved,  but  no  express  Dissolution  was  had. 
The  Agreement  recited,  that  Brooke  being  desirous  to  have 
the  Profits  of  the  Trade  to  himself,  and  Pell  being  desi- 
rous to  relinquish  his  Right  to  the  Trade  and  Profits,  it 
was  agreed,  that  Brooke  should  give  Pell  a  Bond  for  2485/, 


GRACE  V.  SMITH  179 

which  Pell  had  brought  into  the  Trade  with  Interest  at 
five  per  Cent,  which  was  accordingly  done.  And  it  was 
farther  agreed,  that  Brooke  should  pay  to  Pell  200I.  per 
Annum  for  six  Years,  if  Brooke  so  long  lived,  as  in  lieu 
of  the  Profits  of  the  Trade;  and  Brooke  covenants,  that 
Pell  should  have  free  Liberty  to  inspect  his  Books.  Brooke 
became  a  Bankrupt  before  any  thing  was  paid  to  Pell. 
And  this  x\ction  being  brought  for  a  Debt  incurred  by 
Brooke  in  the  Course  of  Trade,  Lord  Mansfield  held  that 
Pell  was  a  secret  Partner.  This  was  a  Device  to  make 
more  than  legal  Interest  of  [Money,  and  if  it  was  not  a 
Partnership  it  was  a  Crime.  And  it  shall  not  lie  in  the  De- 
fendant Pell's  jMouth  to  say.  It  is  Usur}-,  and  not  a  Part- 
nership." 

Grofe  and  Adair  for  the  Defendant  argued,  that  the 
present  Case  is  very  distinguishable  from  that  of  Bloxham 
and  Pell.  Pell  was  to  be  paid  out  of  the  Profits  of  the 
Trade,  as  appears  from  the  Covenant  to  inspect  the  Books, 
which  else  would  be  useless.  His  Annuity  was  expressly 
given,  as  and  in  lieu  of  those  Profits.  It  was  contingent 
in  another  View,  as  it  depended  on  the  Life  of  Brooke,  by 
whom  those  Profits  were  to  be  made.  In  our  Case  the 
Annuity  is  certain,  not  casual ;  it  does  not  depend  on  carry- 
ing on  the  Trade,  nor  to  cease  when  that  is  left  off,  but 
is  due  out  of  the  Estate  of  Robinson.  It  is  not  a  neces- 
sary- Dilemma,  that  it  must  be  either  Usury  or  Partner- 
ship. It  may  be,  and  probably  was,  a  Premium  for  the 
Goodwill  of  the  Trade.  Two  thousand  Guineas  is  no  un- 
common Price  for  turning  over  the  Profits  of  a  Trade  so 
beneficial,  that  it  appears  to  have  been  rated  at  1000/.  to 
each  Partner  in  the  Space  of  less  than  eight  Months.  And 
whether  that  Sum  is  agreed  to  be  paid  at  once,  or  by  seven 
Installments,  it  is  the  same  Thing.  Besides,  whether  there 
be  or  be  not  a  secret  constructive  Partnership,  is  a  Question 
proper  for  a  Jury,  who  have  here  decided  it  on  Considera- 
tion of  all  the  Circumstances. 


180  PARTNER'S  POWER  TO  BIND  COPARTNER 

De  Grey  Chief  Justice. 

The  only  Question  is,  what  constitutes  a  secret  Part- 
ner? Every  Man  who  has  a  Share  of  the  Profits  of  a 
Trade,  ought  also  to  bear  his  Share  of  the  Loss.  And  if 
any  one  takes  Part  of  the  Profit,  he  takes  a  Part  of  that 
Fund  on  which  the  Creditor  of  the  Trader  relies  for  his 
Payment.  If  any  one  advances  or  lends  IVIoney  to  a  Trader, 
it  is  only  lent  on  his  general  personal  Security.  It  is  no 
specific  Lien  upon  the  Profits  of  the  Trade,  and  yet  the 
Lender  is  generally  interested  in  those  Profits ;  he  relies 
on  them  for  Repayment.  And  there  is  no  Difference 
whether  that  Money  be  lent  dc  novo,  or  left  behind  in  Trade 
by  one  of  the  Partners  who  retires.  And  whether  the 
Tenns  of  that  Loan  be  kind  or  harsh,  makes  also  no  man- 
ner of  Difference.  I  think  the  true  Criterion  is,  to  en- 
quire whether  Smith  agreed  to  share  the  Profits  of  the 
Trade  with  Robinson,  or  whether  he  only  relied  on  those 
Profits,  as  a  Fund  of  Payment :  A  Distinction  not  more 
nice  than  usually  occurs  in  Questions  of  Trade  or  Usury. 
The  Jury  have  said  this  is  not  payable  out  of  the  Profits; 
and  I  think  there  is  no  Foundation  for  granting  a  new 
Trial. 

Gould  Justice,  same  Opinion. 

Blackstonc  Justice,  same  Opinion.  I  think  the  true 
Criterion  (when  Money  is  advanced  to  a  Trader)  is  to 
consider  whether  the  Profit  or  Premium  is  certain  and  de- 
fined, or  casual,  indefinite  and  depending  on  the  Accidents 
of  Trade.  In  the  former  Case  it  is  a  Loan  (whether  usuri- 
ous or  not,  is  not  Material  to  the  present  Question)  in 
the  latter  a  Partnership.  The  Hazard  of  Loss  and  Profit 
is  not  equal  and  reciprocal,  if  the  Lender  can  receive  only 
a  limited  Sum  for  the  Profits  of  his  Loan,  and  yet  is  made 
liable  to  all  the  Losses,  all  the  Debts  contracted  in  the  Trade, 
to  any  Amount. 

Nares  Justice,  same  Opinion. 

Rule  discharged.* 


^Compare:    Hoare  v.  Dawes,  i  Douglas,  371,  1780.     (B,  C,  D  et  al. 


GRACE  V.  SMITH  181 

separately  employed  A  to  buy  and  sell  tea.  A,  in  executing  the  orders, 
purchased  one  lot  of  tea ;  two-sixteenths  for  B  and  the  rest  for  himself 
and  the  others  in  different  amounts  according  to  the  orders  he  had  re- 
ceived. B,  C,  D  et  al.  never  saw  each  other,  but  each  when  he  gave  his 
order  probably  knew  that  A  would  execute  it  by  buying  one  lot  of  tea 
for  a  number  of  customers.  On  the  purchase  A  received  a  warrant, 
which  he  pledged  with  a  bank  for  an  advance  of  the  purchase  j)rice. 
Tea  falling  in  value,  the  lot  purchased  was  resold  for  less  than  the 
advance.  B  paid  to  the  Bank  two  sixteenths  of  the  unpaid  advance. 
A,  C  ct  al.  having  died  or  become  bankrupts,  the  Bank  brought  an 
action  for  the  balance  of  the  unpaid  advance  against  B,  on  the  theory 
that  A,  B,  C  et  al.,  were  partners.  Verdict  for  B.  Lord  Mansfield:  "Is 
this  a  partnership  between  the  buyers?  I  think  it  is  not;  but  merely  an 
undertaking  with  the  broker  by  each,  for  a  particular  quantity.  There 
is  no  undertaking  by  one  to  advance  money  for  another,  nor  any  agree- 
mert  to  share  with  one  another  in  the  profit  or  loss." 

Young  v.  Axtell.  mss.  note  of  IMr.  Serjt.  Le  Blanc,  cited  in  2  H.  Bl.. 
p.  242,  1785.  "An  action  to  recover  600/.  and  upwards,  for  coals  sold  and 
delivered  by  the  plaintiff,  a  coal  merchant,  an  agreement  between  the 
defendants  was  given  in  evidence,  stating,  that  the  defendant,  Mrs. 
.A..xtell,  had  lately  carried  on  the  coal  trade,  and  that  the  other  defend- 
ant did  the  same ;  that  Mrs.  Axtell  was  to  bring  what  customers  she 
could  into  the  business,  and  that  the  other  was  to  pay  her  an  annuity, 
and  also  2s.  for  every  chaldron,  that  should  be  sold  to  those  persons 
who  had  been  her  customers,  or  were  of  her  recommending.  The 
plaintiff  also  proved,  that  bills  w^ere  made  out  for  goods  sold  to  her 
customers,  in  their  joint  names;  and  the  question  was,  whether  Mrs. 
Axtell  was  liable  for  the  debt?  Lord  ]\Iansfield  says,  he  should  have 
rather  thought  on  the  agreement  only,  that  Mrs.  Axtell  would  be  liable, 
not  on  account  of  the  annuity,  but  the  other  payment,  as  that  would  be 
increased  in  proportion  as  she  increased  the  business.  However,  as  she 
suffered  her  name  to  be  used  in  the  business,  and  held  herself  out  as  a 
partner,  she  was  certainly  liable,  though  the  plaintiff  did  not,  at  the  time 
of  dealing,  know  that  she  was  a  partner,  or  that  her  name  was  used. 
And  the  jury  accordiils'ly  found  a  verdict  for  the  plaintiff." 

Cooper  V.  Eyre,  i  H.'  Bl.  37,  1788.  (A,  B,  C  and  D  entered  into  an 
agreement  to  purchase  goods  in  the  name  of  A  only,  and  to  take  aliquot 
shares  of  the  purchase.  There  was  no  agreement  to  resell  the  goods. 
A  purchased  the  goods  from  E  and  failed  to  pay.  E  sued  B.  C  and  D 
for  the  price  as  partners.  A  verdict  was  directed  for  the  defendants 
and  a  rule  to  show  cause  why  a  new  trial  should  not  be  granted  was 
discharged.) 

Compare  the  following  early  Scottish  case  in  which  it  was  held  that 
one  who  had  separately  agreed  with  one  of  the  partners  for  a  proportion 
of  his  share,  was  not  a  general  partner.  Fairholm  v.  Majoribanks,  17 
Diet.,  14558,  1725.  See  to  the  same  effect,  Burnett  v.  Snyder,  81  N.  Y. 
55.  1880. 


182  PARTNER'S  POWER  TO  BIND  COPARTNER 


WAUGH  V.  CARVER. 
In  the  Court  of  Common  Pleas,  1793. 

2  Henry  Blackstone's  Reports,  235. 

This  action  of  assumpsit  for  goods  sold  and  deliv- 
ered, work  and  labour  done,  &c.  was  tried  at  Guildhall,  be- 
fore the  Lord  Chief  Justice,  when  a  verdict  was  found  for 
the  Plaintiff,  subject  to  the  opinion  of  the  Court,  on  a  case 
stated. 

Erasmus  and  William  Carver  were  in  the  shipping 
business  at  Gosport;  Archibald  Giesler  was  in  the  shipping 
business  at  Plymouth.  The  Carvers  and  Giesler  entered 
into  an  agreement.  Under  this  agreement  Giesler  removed 
his  business  to  Cowes.  The  Carvers  sent  a  certain  class 
of  business  to  Giesler,  and  also  paid  Giesler  a  certain  pro- 
portion of  the  commissions  they  received;  Giesler  sent  a 
certain  class  of  business  to  the  Carvers,  and  also  paid  the 
Carvers  a  certain  proportion  of  the  commissions  he  re- 
ceived. In  the  agreement  it  was  expressly  stipulated  that 
neither  of  the  parties  should  be  answerable  for  the  acts, 
deeds,  or  receipts  of  the  others;  but  each  separately  for  his 
own  losses.  The  suit  was  against  all  the  parties  to  the 
agreement  as  partners.^ 

The  substance  of  the  argument  for  the  plaintiff  was 
as  follows: 

The  question  in  this  case  is,  whether  the  articles  of 
agreement  entered  into  by  the  Defendants,  constituted  a 
partnership  between  them?  That,  such  was  the  effect  of 
these  articles,  will  appear  by  considering  the  general  rules 
of  law  respecting  partners,  and  the  particular  circumstances 
of  the  case.  The  law  is,  that  wherever  there  is  a  participa- 
tion of  profits  a  partnership  is  created;  though  there  is  a 


*  The  facts  have  been  restated. 


WAUGH  V.  CARVER  183 

difference  between  a  participation  of  profits  and  a  certain 
annual  payment.      *     *     *" 

It  appearing  therefore,  from  these  authorities,  that  a 
participation  of  profits  is  sufficient  to  constitute  a  partner- 
ship, it  remains  to  be  seen,  whether  the  agreement  in  ques- 
tion did  not  estabhsh  such  a  participation  of  the  profits  of 
the  agency  business,  between  the  Defendants,  as  to  make 
them  hable  as  partners.  In  the  first  place,  it  Is  stated  in 
the  recital,  that  the  Carvers  and  Giesler  had  agreed  to  al- 
low each  other  certain  proportions  of  each  others  commis- 
sions and  profits.  It  is  then  agreed,  that  Giesler  should, 
when  required  by  the  Carvers,  remove  from  Plymouth  to 
Cowes,  and  there  establish  a  house :  and  in  consequence  of 
the  Carvers'  recommendation  and  assistance  to  support  the 
house,  Giesler  is  to  allow  them  a  moiety  of  the  commis- 
sion on  ships  putting  into  the  port  of  Cozves,  or  remaining 
in  the  road  to  the  Westward,  addressed  to  him,  and  a  moi- 
ety of  the  discount  on  the  tradesmen's  bills,  employed  on 
such  ships :  he  also  covenants  to  advise  with  the  Carvers, 
and  pursue  such  measures  as  may  appear  to  them  to  be  for 
the  interest  of  the  concerned.  On  the  other  hand,  the  Car- 
vers agree  to  pay  Giesler  three-fifths  of  the  agency  of  all 
vessels,  which  shall  come  from  Cowes  to  Portsmouth,  and 
put  themselves  under  the  direction  of  the  Carvers,  by  the 
recommendation  of  Giesler,  one  half  per  cent,  on  trades- 
men's bills,  and  certain  proportions  of  warehouse  rent  and 
agency.  Each  party  is  likewise  to  produce  true  copies  of 
the  accounts  of  the  ships  to  the  other,  and  neither  is  to 
form  any  other  connection  in  the  agency  business,  during 
the  period  agreed  upon:  and  they  are  to  meet  once  a  year 
at  Gosport,  to  settle  their  mutual  accounts,  and  pay  over 
the  balance.  Now  it  was  not  possible  to  express  in  clearer 
terms,  an  agreement  to  participate  in  the  profits  of  the  busi- 
ness of  ship  agents,  and  to  establish  a  joint  concern  between 


cases 


'  The   discussion  of  the  case  of   Grace  v.   Smith,  supra,  and  other 
given  in  the  notes  to  that  case  is  omitted. 


184         PARTNER'S  POWER  TO  BIND  COPARTNER 

the  two  houses.  It  may  be  objected,  that  there  is  a  proviso, 
that  neither  of  the  parties  shall  be  answerable  for  the  losses 
of  the  other;  but  this  would  certainly  be  not  binding  on  the 
creditors.  Lord  Craven  v.  Widdozvs,  2  Chan.  Cas.  139, 
Heath  V.  Percival,  i  Pre.  JJ'uis.  682.  Rich  v.  Coe,  Cowp. 
636.  An  agreement  to  share  profit  alone,  cannot  prevent 
t;ie  legal  consequence  of  also  sharing  losses,  for  the  benefit 
of  creditors.  Perhaps  it  may  be  difficult  to  find  an  exact 
definition  of  a  partnership,  but  it  has  been  always  holden, 
that  where  there  is  a  share  of  profits,  there  shall  also  be 
share  of  losses,  for  whoever  takes  a  part  of  the  capital, 
or  of  the  profits  upon  it,  takes  a  part  of  that  fund  to  which 
the  public  have  given  credit,  and  to  which  they  look  for 
payment.  If  there  be  no  original  capital,  the  profits  of  the 
trade  are  themselves  a  capital,  to  which  the  creditor  is  to 
have  recourse.  Thus  if  in  the  year  1791,  the  profits  were 
100/.  and  in  the  year  1792,  there  was  a  loss  of  10/.  of  course 
the  profits  of  the  preceding  year,  would  be  the  stock  to 
which  the  creditor  would  resort  for  the  payment  of  the 
debts  which  constituted  part  of  the  loss  of  the  succeeding 
year.  Indeed  it  is  by  no  means  necessary  that  to  constitute 
a  partnership,  the  parties  should  advance  money  by  way 
of  capital ;  many  joint-trades  are  carried  on,  without  any 
such  advance :  there  is  therefore  no  ground  to  object,  in 
the  present  instance,  that  neither  party  brought  any  money 
into  a  common  stock,  in  order  to  carry  on  their  business. 

On  behalf  of  the  Defendants,  the  arguments  were  as 
follows.  The  question  is,  whether  this  agreement  creates 
such  a  partnership,  as  to  make  all  liable  to  the  debts  of 
each.  A  partnership  may  be  defined  to  be,  "the  relation 
of  persons  agreeing  to  join  stock  or  labour,  and  to  divide 
the  profits."  Thus  Pujfendorf  described  it,  "Contractus 
societatis  est,  quo  duo  pluresve  inter  se  peciiniam,  res,  aut 
operas  confenint  eo  fine,  ut  quod  hide  redit  lucri  inter 
singulos  pro  rata  diz'idatur."  lib.  5.  cap.  8.  Partners  there- 
fore, can  only  be  liable  on  the  ground  of  their  being  joint- 
contractors,   or  as  partaking  of  a  joint  stock.      In  many 


WAUGH  V.  CARVER  1S5 

cases,  in  which  questions  of  this  sort  have  arisen,  and  the 
persons  have  been  holden  to  be  partners,  goods  had  been 
sold,  and  a  common  fund  estabhshed,  to  which  the  credi- 
tor might  look  for  payment ;  and  there  it  was  highly  reason- 
ble  to  hold,  that  if  many  persons  purchase  goods  on  tlieir 
joint  account,  though  in  the  name  of  one  only,  and  are  to 
share  the  profits  of  a  re-sale,  they  shall  be  considered  as 
joint-contractors,  and  therefore  liable  as  partners.  So  if 
a  joint-stock  or  capital,  or  joint-labour  be  employed,  each 
party  is  interested  in  the  thing  on  which  it  is  employed,  and, 
in  the  profits  resulting  from  it.  But  in  the  present  case, 
there  is  no  joint-contract  for  the  purchasing  goods,  nor  any 
joint-stock  or  labour,  but  the  parties  are  to  share  in  certain 
proportions,  the  profits  of  their  separate  stock,  and  sepa- 
rate labour :  there  was  no  house  of  trade  or  merchandize 
established,  but  two  distinct  houses,  for  the  purpose  of 
carrying  on  the  business  of  ship  agency,  on  two  distinct 
accounts.  The  profits  are  not  a  capital,  unless  carried  on 
as  capital,  and  not  divided.  Ship  agents  are  not  traders, 
but  their  employment  is  merely  to  manage  the  concerns  of 
such  ships  in  port,  as  are  addressed  to  them.  Suppose  two 
fishermen  were  to  agree  to  share  the  profits  of  the  fish  that 
each  might  catch,  one  would  not  be  liable  for  mending  the 
nets  of  the  other.  So  if  two  watermen  agree  to  divide 
their  fares,  neither  would  be  answerable  for  repairing  the 
other's  boat.  Nor  would  any  artificers  who  entered  into 
similar  agreements  to  share  the  produce  of  their  separate 
labour,  be  obliged  to  pay  for  each  other's  tools  or  materials. 
And  this  is  not  an  agreement  as  to  the  agency  of  all  ships, 
with  which  the  parties  were  concerned,  for  such  as  came 
to  the  particular  address  of  one,  were  to  be  the  sole  profit 
of  that  one.  It  was  indeed  clearly  the  intent  of  the  parties 
to  the  agreement,  and  is  so  expressed,  that  neither  should 
be  answerable  for  the  losses,  acts  or  deeds  of  the  other, 
and  that  the  agreement  should  not  extend  to  their  sepa- 
rate mercantile  concerns.  It  must  therefore  be  a  strong 
and  invariable  rule  of  law,  that  can  make  the  parties  to 


186         PARTNER'S  POWER  TO  BIND  COPARTNER 

the  agreement  responsible  for  each  other,  against  their  ex- 
press intent.  But  all  cases  of  partnership  which  have  been 
hitherto  decided,  have  proceeded  on  one  or  other  of  the  fol- 
lowing grounds :  i .  Either  there  has  been  an  avowed  au- 
thority given  to  one  party  to  contract  for  the  rest.  2.  Or 
tliere  has  been  a  joint-capital  or  stock.  3.  Or,  in  cases  of 
dormant  partners,  there  has  been  an  appearance  of  fraud  in 
holding  out  false  colours  to  the  world.  Now  the  present 
case,  is  not  within  either  of  those  principles :  because  there 
was  no  authority  given  to  either  party  to  contract  for  the 
others;  nor  was  there  any  joint-capital  or  stock;  nor  were 
the  public  deceived  by  any  false  credit ;  no  fraud  is  stated 
or  attempted  to  be  proved,  nor  can  the  Court  collect  from 
the  articles  that  any  was  intended :  it  was  merely  a  purchase 
of  Gicslcr's  profits  by  giving  him  a  share  of  those  of  the 
Carvers,  to  prevent  a  competition  between  them. 

Lord  Chief  Justice  Eyre. — This  case  has  been  ex- 
tremely well  argued,  and  the  discussion  of  it  has  enabled 
me  to  make  up  my  mind,  and  removed  the  only  difficulty 
I  felt,  which  was.  whether  by  construing  this  to  be  a  part- 
nership, we  should  not  determine,  that  if  there  was  an 
annuity  granted  out  of  a  banking  house,  to  the  widow,  for 
instance,  of  a  deceased  partner,  it  would  make  her  liable 
to  the  debts  of  the  house,  and  involve  her  in  a  bankruptcy. 
But  I  think  this  case  will  not  lead  to  that  consequence. 

The  definition  of  a  partnership  cited  from  Piijfendorf 
is  good  as  between  the  parties  themselves,  but  not  with  re- 
spect to  the  world  at  large.  If  the  question  were  between 
A.  and  B.  whether  they  were  partners  or  not,  it  would  be 
\tr\  well  to  inquire  whether  they  had  contributed,  and  in 
what  proportions,  stock  or  labour,  and  on  what  agreement 
they  were  to  divide  the  profits  of  that  contribution.  But  in 
all  these  cases,  a  very  different  question  arises,  in  which 
that  definition  is  of  little  service.  The  question  is  generally, 
not  between  the  parties,  as  to  what  shares  they  shall  divide, 
but  respecting  the  creditors,  claiming  a  satisfaction  out  of 
the  funds  of  a  particular  house,  who  shall  be  deemed  liable 


WAUGH  V.  CARVER  187 

in  regard  to  these  funds?  Now  a  case  may  be  stated,  in 
which  it  is  the  clear  sense  of  the  parties  to  the  contract,  that 
they  shall  not  be  partners;  that  A.  is  to  contribute  neither 
labour  nor  money,  and,  to  go  still  farther,  not  to  receive 
any  profits.  But  if  he  will  lend  his  name  as  a  partner-,  he 
becomes  as  against  all  the  rest  of  the  world,  a  partner,  not 
upon  the  ground  of  the  real  transaction  between  them,  but 
upon  principles  of  general  policy,  to  prevent  the  frauds  to 
which  creditors  would  be  liable,  if  they  were  to  suppose  that 
they  lent  their  money  upon  the  apparent  credit  of  three  or 
four  persons,  when,  in  fact,  they  lent  it  only  to  two  of  them, 
to  whom,  without  the  others,  they  would  have  lent  nothing. 
The  argument  gone  into,  however  proper  for  the  discussion 
of  the  question,  is  irrelevant  to  a  great  part  of  the  case. 
Whether  these  persons  were  to  interfere  more  or  less,  with 
their  advice  and  directions,  and  many  small  parts  of  the 
agreement,  I  lay  entirely  out  of  the  case ;  because  it  is  plain 
upon  the  construction  of  the  agreement,  if  it  be  construed 
only  between  the  Carvers  and  Giesler,  that  they  were  not, 
nor  ever  meant  to  be  partners.  They  meant  each  house  to 
carry  on  trade  without  risk  of  each  other,  and  to  be  at 
their  own  loss.  Though  there  was  a  certain  degree  of  con- 
trol at  one  house,  it  was  without  an  idea  that  either  was  to 
be  involved  in  the  consequences  of  the  failure  of  the  other, 
and  without  understanding  themselves  responsible  for  any 
circumstances  that  might  happen  to  the  loss  of  either.  That 
was  the  agreement  between  themselves.  But  the  question 
is,  whether  they  have  not,  by  parts  of  their  agreement,  con- 
stituted themselves  partners  in  respect  to  other  persons. 
The  case  therefore  is  reduced  to  the  single  point,  whether 
the  Carvers  did  not  entitle  themselves,  and  did  not  mean  to 
take  a  moiety  of  the  profits  of  Giesler's  house,  generally  and 
indefinitely  as  they  should  arise,  at  certain  times  agreed  upon 
for  the  settlement  of  their  accounts.  That  they  have  so 
done,  is  clear  upon  the  face  of  the  agreement :  and  upon 
the  authority  of  Grace  v.  Smith,  he  takes  a  moiety  of  all 
the  profits  indefinitely,  shall,  by  operation  of  law,  be  made 


188  PARTNER'S  POWER  TO  BIND  COPARTNER 

liable  to  losses,  if  losses  arise,  upon  the  principle  that 
by  taking  a  part  of  the  profits,  he  takes  from  the  creditors  a 
part  of  that  fund  which  is  the  proper  security  to  them  for 
the  payment  of  their  debts.  That  was  the  foundation  of 
the  decision  in  Grace  v.  Smith,  and  I  think  it  stands  upon 
the  fair  ground  of  reason.  I  cannot  agree,-  that  this  was  a 
mere  agency,  in  the  sense  contended  for  on  the  part  of  the 
Defendants,  for  there  was  a  risk  of  profit  and  loss;  a  ship 
agent  employs  tradesmen  to  furnish  necessaries  for  the  ship, 
he  contracts  with  them,  and  is  liable  to  them ;  he  also  makes 
out  their  bills  in  such  a  way  as  to  determine  the  charge  of 
commission  to  the  ship  owners.  With  respect  to  the  com- 
mission indeed,  he  may  be  considered  as  a  mere  agent,  but  as 
to  the  agency  itself,  he  is  as  much  a  trader  as  any  other  man, 
and  there  is  as  much  risk  of  profit  and  loss,  to  the  person 
with  whom  he  contracts,  in  the  transactions  with  him,  as 
with  any  other  trader.  It  is  true,  he  will  gain  nothing  but 
his  discount,  but  that  is  a  profit  in  the  trade,  and  there  may 
be  losses  to  him,  as  w^ell  as  to  the  owners.  If  therefore  the 
principle  be  true,  that  he  who  takes  the  general  profits  of  a 
partnership  must  of  necessity  be  made  liable  to  the  losses,  in 
order  that  he  may  stand  in  a  just  situation  with  regard  to 
the  creditors  of  the  house,  then  this  is  a  case  clear  of  all 
difficulty.  For  though  with  respect  to  each  other,  these 
persons  were  not  to  be  considered  as  partners,  yet  they 
have  made  themselves  such,  with  regard  to  their  transac- 
tions with  the  rest  of  the  world.  I  am  therefore  of  opin- 
ion that  there  ought  to  be  judgment  for  the  Plaintiff. 

Gould,  J.     I  am  of  the  same  opinion. 

Heath,  J.     I  am  of  the  same  opinion. 

RooKE,  J.  having  argued  the  case  at  the  bar,  declined 

giving  any  opinion. 

Judgment  for  the  Plaintiff.^ 


^Rcid  V.  Hollingshead,  4  B.  &  C.  867,  1825.  (A,  a  merchant,  directed 
B,  a  broker,  to  purchase  cotton,  allowing  B  one-third  interest  therein  in 
lieu  of  commission.  In  the  correspondence  between  A  and  B  the  matter 
was  referred  to  as  "joint  account,"  "joint  concern,"  etc.  Held,  that  A 
and  B  were  partners.) 


WAUGH  V.  CARVER  189 

Barklic  v.  Scott,  I  H.  &  B.  S3,  1827.  (C  and  D  were  in  partnership. 
A  invested  money  in  the  firm  for  A's  infant  son,  B.  C  and  D  wrote  to 
A  acknowledging  the  receipt  of  the  money  as  "B's  capital  put  into  this 
house,"  and  agreed  to  account  to  A  as  trustee  of  B  for  one-third  of  the 
profits,  and  to  be  governed  and  directed  by  A's  advice  in  all  matters 
pertaining  to  the  business.  A  had  no  personal  interest  in  the  business, 
nor  did  he  reserve  any  power  as  trustee  for  B  of  drawing  out  the^prin- 
cipal  or  profits.    Held,  that  A  was  not  a  partner.) 

Cox  V.  Delano,  3  Dev.  85,  N.  C.  1831.  ("Memorandum  of  an  agree- 
ment by  and  between  Benjamin  Delano,  and  Samuel  Whelden.  The 
said  Delano  agrees  to  let  a  schooner  to  him  belonging,  *  *  *  |^q  jj^g 
said  Whelden,  upon  the  condition  as  follows  :  Said  Whelden  to  pay  all 
charges  which  may  arise  on  said  schooner,  as  long  as  he  shall  have 
possession  of  her,  except  *  *  *  one-half  expenses  of  port  charges, 
one-half  the  expense  of  lights  vised  on  board,  and  the  wages  of  one 
seaman.  The  said  Whelden  is  to  return  the  schooner  at  the  expiration 
of  six  months,  in  like  good  order  as  delivered.  The  said  Whelden  is 
empowered  to  invest  the  proceeds  of  freight  in  such  merchandise  as  he 
may  think  of  mutual  interest.  All  profit  over  and  above  the  expenses 
above  mentioned,  to  be  equally  divided."  Held,  that  the  agreement 
constituted  the  parties  to  it  partners.  Henderson,  C.  J. :  "He  who 
shares  in  the  profits,  which  are  nothing  but  the  net  earnings,  should 
also  share  in  the  losses,  if  there  be  any.  The  moral  right  of  making 
gains  is  based  upon  this  principle.  The  rule  is  easily  laid  down  ;  the 
difficulty  is  in  its  application.  Where  a  part  of  the  profits  themselves 
is  the  property  of  the  party,  he  is  then  a  partner.  Where  their  amount 
merely  ascertains  the  amount  of  a  debt  or  duty,  but  they  themselves  do 
not  belong  to  the  party,  there  is  not  a  partnership.") 

Goddard  v.  Hodges,  i  Cr.  &  M.  2)2i,  1832.  (The  shareholders  in  a 
certain  company  were  partners.  A  was  the  solicitor  of  the  company. 
B  at  the  request  of  A  became  the  holder  of  certain  shares  for  the 
benefit  of  A,  A  paying  all  expenses  on  the  shares.  A  brought  a  suit 
in  assumpsit  for  money  paid  out  by  him  in  travelling  for  the  company. 
Held,  that  he,  A,  was  a  partner;  and,  therefore,  could  not  sue  the  other 
partners  at  law  until  a  balance  was  ascertained.) 

Leggett  v.  Hyde,  58  N.  Y.  272,  1874.  (A  advanced  to  B  and  C  for 
use  in  their  business  $2,000.  A  was  to  receive  one-third  of  the  profits 
to  be  settled  half  yearly,  and  at  the  end  of  the  year  if  he  did  not  wish 
to  go  into  partnership  the  $2,000  was  to  be  repaid.  A  never  received 
any  profits  or  exercised  any  control.  D  sued  A  as  a  partner  with  B 
and  C  for  goods  sold  to  the  firm.  The  Court  directed  a  verdict  in  favor 
of  D.  Judgment  affirmed.  Folger,  J. :  "It  was  one-third  of  the  profits 
that  he  was  to  have,  and  not  a  sum  in  general,  equal  to  that  one-third. 
So  that  he  was  to  take  it  as  profits,  and  not  as  an  amount  due ;  not  as  a 
measure  of  compensation,  Isut  as  a  result  of  capital  and  industry," 
p.  277.)  As  to  how  far  this  case  represents  the  present  law  in  New 
York,  see  opinion  in  Beecher  v.  Burk  and  case  of  Hackett  v,  Stanly, 
infra. 


190  PARTNER'S  POWER  TO  BIxND  COPx\RTNER 


WILKINSON  V.  FRASIER. 
At  Nisi  Prius,  in  the  Court  of  Common  Pleas,  1803. 

4  'Espinasse's  Reports,  182. 

Assumpsit  against  the  Defendant,  who  was  the 
Captain  of  a  ship  employed  in  the  Southern  Whale-Fishery, 
to  recover  seamens'  wages. 

The  action  was  brought,  and  the  Plaintiff  declared 
on  the  usual  articles  for  voyages  on  that  fishery;  by  which 
the  seamen  are,  by  their  articles,  to  receive  a  certain  share 
of  the  produce  of  the  cargo  in  lieu  of  wages. 

The  Plaintiff  proved  the  articles;  which  were  signed 
by  the  Plaintiff,  as  a  mariner;  and  by  the  Defendant,  as 
captain;  the  sailing  of  the  vessel  on  the  voyage,  and  the 
Plaintiff's  service;  and  that  the  oil,  of  which  the  cargo  was 
composed,  had  been  sold,  and  produced  a  certain  sum;  for 
the  share  of  which  the  Plaintiff  went. 

These  articles  stipulated,  on  the  part  of  the  sailors. 
That  they  should  proceed  on  the  voyage,  do  their  duty,  &;c. ; 
and  on  the  part  of  the  captain,  That  the  produce  of  the 
voyage  should  be  divided  in  certain  proportions :  via.  A 
certain  proportion  to  the  owners,  a  certain  proportion  to 
the  captain,  and  the  rest  to  the  other  officers  and  seamen. 
The  proportion  of  a  common  sailor  was,  a  one-hundred  and 
ninetieth  part. 

Best,  Serjt.  objected:  That  the  action  could  not  be 
maintained  against  the  Captain,  who  was  the  present  De- 
fendant; because  the  Defendant,  as  well  as  the  Plaintiff, 
was  to  be  paid  out  of  the  profits  of  the  voyage:  that  they 
were  therefore  partners ;  and  as  one  partner  could  not  main- 
tain this  action  against  another,  the  action  was  not  main- 
tainable. 

Lord  Alvanley  said,  He  would  not  nonsuit  the  Plain- 
tiff on  such  an  objection:  That  the  Plaintiff,  and  the  other 


WILKINSON  V.  FRASIER  191 

sailors,  were  hired  by  the  Defendant  and  the  owners,  to 
serve  on  board  the  ship  for  wages  to  be  paid  to  him;  and 
the  share  was  in  the  nature  of  wages,  unHqiiidated  at  the 
time,  but  capable  of  being  reduced  to  a  certainty  on  the 
sale  of  the  oil,  which  had  taken  place :  and  that  he  should 
not  therefore  consider  them  as  partners,  but  as  entitled  to 
wages  to  the  extent  of  their  proportion  in  the  produce  of 
the  voyage. 

There  was  a  verdict  for  the  Defendant.^ 


^Compare:  Hesketh  v.  Robertson,  4  East.  144,  1803.  (A  authorized 
B  to  purchase  goods  for  him.  A,  B  for  his  trouble  to  have  half  the 
profits.  B  paid  for  the  goods,  and  sued  A  in  assumpsit  for  the  money. 
Held,  he  could  recover.) 

French  v.  Styring,  2  C.  B.,  n.  s.,  357,  1857.  (A  and  B  being  joint  tenants 
of  a  race  horse,  it  was  agreed  between  them  that  A  should  keep  and 
train  and  have  the  general  management  of  the  horse,  conveying  him  to 
and  entering  him  for  the  different  races;  that  the  expenses  of  keep 
should  be  borne  jointly,  and  the  horse's  winnings  be  equally  divided 
between  them.  Held,  that  even  if  this  agreement  constituted  a  part- 
nership in  the  management  of  the  horse,  a  question  on  which  the  Court 
was  divided  in  opinion,  nevertheless  A  could  sue  B  for  a  moiety  of 
advances  made  by  A  on  account  of  the  keep  of  the  horse  as  being  in  the 
nature  of  an  advance  of  capital  for  B.) 


192  PARTNER'S  POWER  TO  BIXD  COPARTNER 


DUNHAM  V.  ROGERS. 
In  the  Supreme  Court  of  Pennsylvania,  1845. 

I  Pennsylvania  Reports.  255. 

This  was  an  appeal  by  Dunham  from  the  judgment  of 
a  justice  of  the  peace,  before  whom  Rogers  brought  suit 
against  Dunham  for  the  value  of  certain  lumber,  sold  and 
appropriated  to  the  use  of  the  defendant.-^ 

Gibson,  C.  J. : 

It  is  not  alleged  that  this  lumber  was  sold  immediately 
to  Dunham,  and  as  it  was  furnished  to  Bronson  and  used 
by  him,  if  Dunham  is  not  liable  for  the  price  of  it  as  Bron- 
son's  partner,  he  is  not  liable  for  it  at  all.  Do  the  terms 
of  their  agreement  make  him  liable  for  Bronson's  pur- 
chases to  third  persons?  Bronson  let  his  storehouse,  with 
the  unenclosed  ground,  to  Dunham,  for  the  purposes  of  a 
store  and  lumber  yard;  and  agreed  to  furnish  him  wooden 
handles  for  shovels  and  other  implements,  made  to  order, 
out  of  Bronson's  stuff,  and  to  be  paid  for,  according  to  a 
tariff  of  prices,  out  of  the  store  or  the  proceeds  of  the  han- 
dles; while  Dunham  agreed  to  stock  the  store  and  conduct 
the  business  of  it.  So  far  the  agreement  discloses  no  fea- 
ture of  partnership;  but  in  further  compensation  of  Bron- 
son's labour,  skill,  and  the  rent  of  the  storehouse,  Dunham 
agreed  to  allow  him  a  commission  of  fifty  per  cent,  on  the 
net  profits  of  the  whole.  Now,  it  has  been  so  often  and 
so  invariably  ruled  in  England  and  America,  that  a  com- 
mission on  profits  is  not  such  an  interest  in  the  concern  as 
constitutes  partnership,  that  the  point  is  at  rest.  What 
staggers  the  mind,  in  this  instance,  is  the  apparent  shallow- 
ness of  the  distinction,  when  it  is  considered  that  a  com- 
mission of  fifty  per  cent,  is  no  more  nor  less  than  an  equal 

*  The  statement  of  the  case  in  the   report,   and   the  arguments   of 
counsel  are  omitted. 


DUNHAM  f..  ROGERS  193 

division  of  the  profits ;  but  it  must  not  be  forgotten  that 
the  distinction  is  an  arbitrary  one,  resting  on  authority, 
not  principle ;  and  that,  whatever  be  the  proportion,  the  re- 
lation produced  by  a  compensation  in  the  form  of  a  com- 
mission is  in  every  instance  the  same. 

But,  by  the  terms  of  the  contract,  Bronson,  and  not 
Dunham,  was  to  procure  and  pay  for  the  stuff;  and  they 
were  not  to  be  partners  in  that  part  of  the  business.  This 
provision,  I  admit,  would  be  inoperative  against  strangers, 
if  the  parties  had  held  themselves  out  to  the  public  as  part- 
ners, both  in  buying  and  selling ;  but  assuming,  for  the  mo- 
ment, that  there  was  indeed  a  partnership  in  the  handles 
when  furnished,  and  in  the  store  when  stocked  with  goods, 
yet  it  is  to  be  borne  in  mind  that  the  handles,  as  well  as 
the  store-goods,  were  to  be  put  into  the  concern  as  sepa- 
rate contributions  to  the  joint-stock;  and  that,  as  the  stuff 
for  the  handles  was  to  be  procured  by  Bronson,  it  was,  con- 
sequently to  be  paid  for  by  him.  just  as  the  store-goods 
were  to  be  procured  and  paid  for  by  Dunham,  having  been 
purchased  on  separate  account.  There  may  be  a  partner- 
ship for  selling,  and  not  for  buying;  or,  for  buying,  and 
not  for  selling;  or,  for  both  buying  and  selling,  which  is 
the  most  usual:  as,  if  several  put  separate  quantities  of 
wheat  into  a  common  stock,  to  be  ground  into  flour  and 
sold  on  joint  account ;  or  agree  to  buy  jointly,  and  divide 
the  article  when  bought ;  or  agree  to  buy  and  sell  on  joint 
account.  In  the  first  case,  each  would  be  liable  for  his  own 
purchases  only;  but  in  the  second  and  third  cases,  each 
would  be  liable  for  the  whole.  Now,  if  there  were  any 
partnership  in  this  instance,  it  would  be  of  the  first  class; 
and  in  any  view  of  the  case,  the  defendant  would  not  be 
liable. 

Judgment  reversed,  and  venire  de  novo  awarded.^ 


'Compare:  Heap  v.  Dobson,  15  C.  B..  n.  s.,  460,  1863.  (A.  B  and  C 
agreed  that  each  should  furnish  £3,000  worth  of  goods,  to  be  shipped  on 
a  joint  adventure,  the  profits  to  be  divided  according  to  the  amount  of 
their  several  shipments.  Held,  that  B  and  C  were  not  responsible  for 
goods  bought  by  A  to  furnish  his  quota  of  the  cargo.) 


194         PARTNER'S  POWER.  TO  BIND  COPARTNER 


HOLMES  V.  OLD  COLONY  RAILROAD  CO. 
In  the  Supreme  Judicial  Court  of  Massachusetts, 

1855- 

5  Gray's  Massachusetts  Reports,  58. 

Action  of  contract  against  James  S.  Parker,  Henry 
C.  Tribou  and  the  Old  Colony  Railroad  Corporation,  de- 
scribed as  copartners  and  keepers  of  the  Samoset  House 
in  Plymouth,  under  the  style  of  Parker  &  Tribou,  to  re- 
cover for  supplies  furnished  by  the  plaintiffs  to  that  hotel. 
Parker  and  Tribou  pleaded  certificates  of  discharge  in  in- 
solvency, and  the  plaintiffs  discontinued  against  them;  and 
the  plaintiffs  and  said  corporation  submitted  the  case  to  the 
decision  of  the  court. ^ 

Dewey,  J.  It  is  contended  on  the  part  of  the  plain- 
tiffs, that  the  stipulations  existing  between  the  Old  Colony 
Railroad  Corporation  and  Parker  and  Tribou,  the  lessees 
of  the  hotel  called  the  Samoset  House,  in  relation  to  the 
leasing  of  said  house,  were  such  as  to  render  the  Old  Col- 
ony Railroad  Corporation  a  partner  in  the  concern,  and 
liable,  as  such,  to  creditors  who  may  have  furnished  pro- 
visions and  other  articles  for  the  hotel,  at  the  request  of 
Parker  and  Tribou. 

Such  copartnership  is  supposed  to  arise  from  the  agree- 
ment between  these  parties,  providing  that  the  Old  Colony 
Railroad  Corporation  shall  receive  for  the  use  of  the  prem- 
ises leased,  in  addition  to  the  sum  of  five  hundred  dollars 
for  the  use  of  the  furniture,  "one-half  of  the  net  proceeds 
arising  from  keeping  the  house  as  a  hotel." 

Whatever  doubts  may  formerly  have  existed  as  to  the 
effect  of  an  arrangement  like  that  made  in  the  present  case, 
entitling  the  lessee  to  receive,  as  a  compensation   for  the 


'  The  Reporter's  statement  of  the  facts  of  the  case  is  omitted. 


HOLMES  z:  OLD  COLONY  RAILROAD  CO.  195 

use  of  his  property  or  capital  stock,  one  moiety  of  the  net 
proceeds  arising  from  the  business  transacted,  that  ques- 
tion seems  now  fully  settled  at  least  in  this  commonwealth. 

It  is  no  longer  true  that  receiving  one-half  of  the 
profits,  or  one-half  the  net  profits,  arising  from  articles 
manufactured  and  sold,  or  resulting  from  business  in  which 
one  furnishes  the  stock  in  trade  and  another  performs  the 
labor,  necessarily  creates  a  partnership.  It  is  always  com- 
petent to  look  at  the  particular  circumstances  of  the  case, 
and  ascertain  thereby  whether  it  may  not  be  merely  a  com- 
pensation to  a  party  for  his  labors  and  services,  or  for  fur- 
nishing the  raw  materials,  or  a  mill  privilege,  or  a  factory, 
from  which  the  other  is  to  earn  profits.  Story  on  Part. 
Sec.  36. 

This  question  was  very  fully  considered  in  the  case  of 
Denny  v.  Cabot,  6  Met.  82,  where  it  is  said  by  Judge  Wilde, 
in  delivering  the  opinion  of  the  court,  "where  a  party  is  to 
receive  a  compensation  for  his  labor,  in  proportion  to  the 
profits  of  the  business,  without  having  any  specific  lien 
upon  such  profits,  to  the  exclusion  of  other  creditors,  there 
seems  to  be  no  reason  for  holding  him  liable  as  a  partner, 
even  to  third  persons."     6  Met.  92. 

That  case  was  followed  by  Bradley  v.  JVhite,  10  ]\Iet. 
303,  where  the  question  arose  upon  an  agreement  that  A 
should  furnish  the  goods  for  a  store,  and  pay  all  expenses, 
and  B  should  transact  the  business  of  the  store,  and  re- 
ceive half  the  profits  for  so  doing;  and  it  was  held,  that 
this  did  not  constitute  B  a  partner,  and  that  he  was  not 
liable  to  a  creditor  who  had  furnished  goods  for  such 
store. 

It  may  be  further  remarked,  that  in  relation  to  con- 
tracts for  the  chartering  of  vessels,  where  it  was  stipulated 
that  the  owner  of  the  vessel  should  receive  a  certain  per- 
centage on  the  profits  of  the  voyage,  it  was  early  held  that 
such  an  interest  in  the  profits  did  not  constitute  a  partner- 
ship. Reynolds  v.  Toppan,  15  Mass.  t^jt,.  Cutler  v.  Win- 
sor,  6  Pick.   335. 


196         PARTNER'S  POWER  TO  BIND  COPARTNER 

In  looking  at  the  particular  contract  existing  between 
these  parties,  it  is  quite  obvious  that  no  partnership  was 
contemplated  by  them.  It  was  a  part  of  the  stipulation, 
clearly  expressed,  that  the  labor  and  expenditures  in  carry- 
ing on  the  hotel  were  matters  solely  in  the  hands  of  Parker 
and  Tribou,  and  all  bills  were  to  be  paid  by  them.  The 
articles  bought  by  them  were  their  own  property,  as  were 
all  moneys  received  from  the  guests  of  the  house,  and  the 
Old  Colony  Railroad  Corporation  had  no  right  or  author- 
ity over  either.  It  seems  to  us  to  have  been,  on  the  part 
of  the  Old  Colony  Railroad  Corporation,  a  mere  leasing 
of  the  house  and  furniture,  but  making  the  rent  of  the  for- 
mer to  depend  wholly  upon  the  success  of  the  establishment. 
If  no  profits  were  realized,  they  would  receive  no  rent; 
but,  beyond  this,  they  were  not  to  be  affected  by  the  losses 
that  might  occur  in  the  keeping  of  the  hotel. 

The  agreement  on  the  part  of  Parker  and  Tribou  to 
keep  exact  accounts  of  all  receipts  and  expenditures,  which 
should  be  open  to  the  inspection  of  the  corporation,  was  a 
proper  arrangement  to  carry  out  the  fulfilment  of  the  stip- 
ulation to  pay  one-half  of  the  net  proceeds  arising  from 
keeping  the  'house,  for  rent  of  the  same,  and  does  not  nec- 
essarily import  any  partnership  in  the  proceeds  thus  re- 
ceived by  Parker  and  Tribou. 

Applying  to  the  present  case  the  legal  principles  so 
fully  settled  in  the  cases  above  referred  to,  the  court  are 
of  opinion  that  this  action  cannot  be  maintained  against 
the  Old  Colony  Railroad  Corporation. 

Judgment  for  the  defendants. 


cox  V.  HICKMAN  197 


COX  v.  HICKMAN. 
In  the  House  of  Lords,  i860. 

8  House  of  Lords  Cases,  268. 

This  was  an  action  on  three  bills  of  exchange,  given 
by  one  of  the  managers  of  the  Stanton  Iron  Company,  for 
goods  supplied  to  that  company.  The  declaration  con- 
tained a  count  in  the  usual  form  as  against  acceptors  on 
each  bill,  alleging  it  to  have  been  "directed  to  the  De- 
fendants by  and  under  the  name  of  the  Stanton  Iron  Com- 
pany;" also  counts  for  goods  sold  and  delivered,  and  the 
money  counts.  The  Defendants  severed  in  pleading,  each 
denying  the  acceptance  of  the  bills;  and,  as  to  the  other 
counts,  pleading  never  indebted. 

For  some  time  previously  to  the  year  1849,  Benjamin 
Smith  and  Josiah  Tim  mis  SinitJi  carried  on  business  at  the 
Stanton  Iron  Works,  in  Derbyshire,  as  iron  masters  and 
corn  merchants,  under  the  name  of  B.  Smith  and  Son. 
In  that  year  they  became  embarrassed  in  their  circum- 
stances, and  a  meeting  of  their  creditors  took  place. 
Among  these  were  Cox  and  JJlieatcroft.  On  the  13th 
November  1849,  a  deed  of  arrangement  was  executed  by 
more  than  six-sevenths  in  number  and  value  of  the  credi- 
tors. The  parties  to  this  deed  were  the  Sniiths,  of  the  first 
part;  Frajicis  Sandars,  John  TJwmpson,  James  Haywood, 
David  IVheatcroft,  and  Samuel  ]Valkcr  Cox,  all  of  whom 
were  creditors,  of  the  second  part;  and  the  general  creditors 
(including  those  previously  named  as  trustees),  whose 
names  were  also  set  forth  in  a  schedule,  of  the  third 
part.  The  deed  recited  a  lease  from  1846  for  twenty-one 
years  to  the  Smiths,  that  they  were  unable  to  pay  their 
debts,  and  that  it  liad  been  agreed  that  there  should  be 
an  assignment  by  them  to  the  parties  of  the  second  part, 
as  trustees  on  behalf  of  the  creditors,  to  have  and  hold  the 


198  PARTNER'S  POWER  TO  BIND  COPARTNER 

premises  for  the  term  of  the  lease,  the  machinery,  &c.,  and 
all  the  estate,  &;c.,  subject  to  the  powers  and  provisions 
thereinafter  contained.  The  trusts  were  then  enumerated, 
and,  in  substance,  they  were  to  carry  on  the  business  under 
the  name  or  style  of  "The  Stanton  Iron  Company,"  with 
power  to  do  w^hatsoever  was  necessary  for  that  purpose, 
and  to  pay  the  net  income,  after  answering  all  expenses; 
which  net  income  was  always  to  be  deemed  the  property  of 
the  two  Sniiths,  among  the  creditors  of  the  Smiths.  And 
provision  was  made  for  the  meetings  of  the  creditors;  and, 
at  any  such  meeting,  a  majority  in  value  of  the  creditors 
present  was  to  have  the  power  to  make  rules  as  to  the 
mode  of  conducting  the  business,  or  to  order  the  discon- 
tinuance of  it.  And  when  all  the  debts  had  been  paid, 
the  trustees  were  to  hold  the  trust  estates,  &c.,  in  trust  for 
the  two  SmifJis.  The  deed  contained  a  covenant  by  the 
parties  executing  it,  not  to  sue  the  Smiths  for  existing  debts. 
Cox  never  acted  as  trustee;  and  Wheatcroft  resigned  six 
weeks  after  the  execution  of  the  deed,  and  before  the  goods 
for  which  the  bills  were  given  had  been  supplied ;  no  new 
trustee  was  appointed  in  the  room  of  either.  The  business 
of  the  compafly  was  carried  on  by  the  three  other  persons 
named  as  "parties  of  the  second  part."  In  the  course  of 
it  goods  were  supplied  by  Hickman,  who,  in  March,  April, 
and  June  1855,  drew  three  bills  of  exchange  in  respect 
thereof.  The  first  of  these  bills,  which  was  the  same  in 
form  as  those  afterwards  accepted,  was  in  these  words : 

"Grafton  Iron  Ore  Works,  Blisworth, 
£.  300.  10  March  1855. 

"Four  months  after  date  pay  to  my  order,  in  London, 
three  hundred  pounds,  value  received.     John  Hickman." 
"To  the  Stanton  Iron  Company,  near  Derby." 

The  acceptance  was  in  the  following  form :  "At  Messrs. 
Smith,  Payne  &  Co.,  London.  Per  proc.  The  Stanton 
Iron  Company. — James  Haywood." 

The  cause  was  tried  in  1856  before  the  late  Lord  Chief 


cox  V.  HICKMAN  199 

Justice  Jcrvis,  when  a  verdict  was  found  for  the  Defend- 
ants; but  on  motion  on  leave  reserved,  the  verdict  was 
entered  for  the  Plaintiff  [i8  Com.  Ben.  Rep.  617].  The 
case  was  taken  to  the  Exchequer  Chamber,  when  three 
judges,  Justices  Coleridge,  Eric,  and  Croniptoji,  were^for 
affirming  the  judgment  of  the  Common  Pleas,  and  three 
other  judges.  Barons  Martin,  BranizvcU,  and  Watson,  were 
for  reversing  it  [3  Com.  Ben.  Rep.,  N.  S.,  523.  The  case 
was  also  before  the  Master  of  the  Rolls  (noin.  Re  Stanton 
Iron  Company,  21  Beav.  164)  under  the  Winding-up  Acts, 
when  his  Honor  held,  that  such  a  company  as  existed  under 
the  deed  was  not  within  those  Acts].  The  judgment  there- 
fore stood,  and  was  afterwards  brought  up  to  this  House 

The  Judges  were  summoned,  and  Lord  Chief  Baron 
Pollock  Mr.  Justice  Wightnian,  Air.  Justice  JViUionis,  Mr. 
Justice  Crompton,  Mr.  Baron  Channell,  and  Mr.  Justice 
Blackburn  attended.-' 

The  Lord  Chancellor  (Lord  Campbell )  proposed  the 
following  question  for  the  Judges : — "Are  the  Defendants 
in  this  case  liable  as  acceptors  of  the  bills  of  exchange  de- 
clared upon?" — Agreed  to. 

Mr.  Justice  Blackburn: 
The  Defendants  in  this  case  are  liable  as  acceptors  of 
the  bills  of  exchange  declared  upon.  The  question  entirely 
depends  on  the  effect  of  the  deed  of  arrangement.  If  the 
effect  of  that  deed  is  such  that  creditors  executing  it  thereby 
give  authority  to  those  managing  the  Stanton  Iron  Com- 
(pany,  to  bind  them  to  third  persons  in  the  usual  course  of 
business  by  accepting  bills,  the  Defendants  have  given  such 
authority.  If  the  effect  of  the  deed  is  not  such  that  credi- 
tors executing  that  deed  give  authority  to  bind  them  as  to 
third  persons,  the  Defendants  are  not  shown  to  have  given 
any  such  authority,  for  they  have  never  acted  as  trustees ; 
nor  does  it  appear  that  they  have  done  any  act  beyond  what 


'The  Reporter's  notes  of  the  argument  of  counsel  are  omitted. 


200         PARTNER'S  POWER  TO  BIXD  COPARTNER 

was  proper  to  carry  out  the  arrangement  contained  in  that 
deed. 

The  princi];al  object  of  the  deed  of  arrangement  is  to 
divide  the  property  of  the  Smiths  amongst  the  creditors 
according  to  the  rules  observed  in  banktruptcy;  and  for 
this  purpose  their  property  is  assigned  to  trustees.  The 
goodwill  of  the  business  which  had  been  carried  on  by  the 
Smiths,  was  part  of  their  joint  estate,  and  those  who  had  the 
making  of  the  arrangement  appear  to  have  thought  it  a 
valuable  part  of  the  joint  estate.  Instead  of  disposing  of  it 
to  third  persons,  or  suffering  it  to  be  lost,  the  arrangement 
made  was.  that  the  business  should  in  future  be  carried  on 
under  a  new  style,  that  of  "the  Stanton  Iron  Company,"  by 
the  trustees,  in  the  manner  stipulated  for  in  the  deed  to 
which  the  creditors  are  parties.  The  question  is,  whether 
the  stipulations  are  such  as  to  render  those  creditors  who 
are  parties  to  the  deed  partners  in  the  Stanton  Iron  Com- 
pany, so  far,  at  least,  as  regards  liability  to  third  persons. 

Some  of  the  Judges  in  the  Court  below  have  expressed 
an  opinion  that  there  is  a  distinction  between  the  present 
question-and  that  which  would  have  arisen  if  the  question 
had  been  whether  the  Defendants  were  liable  for  the  con- 
sideration of  these  bills.  I  am,  however,  of  opinion 
that  no  such  distinction  exists.  I  apprehend  that  all  cases 
as  to  liability  of  partners  to  contracts  are  branches  of  the 
law  of  agency,  and  that  the  question  always  is.  whether  the 
contract  entered  into  is  within  the  scope  of  the  authority 
conferred  by  those,  who  are  sought  to  be  charged,  upon 
the  person  actually  making  the  contract.  But  I  take  it 
that,  as  matter  of  law.  those  who  are  partners  in  a  trading 
firm,  do  confer  upon  those  who  are  permitted  to  manage 
the  concern,  authority  to  make  all  contracts  which  in  the 
exigency  of  the  business  are  necessary  and  proper  and  cus- 
tomary. This  prima  facie  authority  may  be  restricted  by 
express  agreement,  but  unless  those  who  deal  with  the  firm 
have  notice  of  this  restriction,  they  are  entitled  to  hold  all 
who  are  partners  bound  by  the  prima  facie  authority  con- 


cox  V.  HICKMAN  201 

ferrecl  on  the  manager,  and  that  equally  whether  the 
persons  sought  to  be  charged  were  persons  to  whom  the 
creditors  gave  credit,  or  dormant  partners,  of  whose  exist- 
ence they  were  unaware.  I  think  the  justice  of  this  rule, 
as  applicable  to  dormant  partners,  very  questionable,  but  I 
do  not  think  it  open  to  question  that  it  is  the  rule  of  law. 
I  think  that  where,  as  in  the  present  case,  the  accepting  of 
bills  is  a  necessary  and  customary  part  of  the  business,  the 
authority  to  accept  them  is  conferred  as  much  as  the  autho- 
rity to  contract  the  debts  for  which  they  are  given.  It  is 
true  the  authority  is  limited  to  accepting  bills  in  the  name 
of  the  firm,  and  binds  only  those  included  in  that  firm,  but 
all  who  are  partners  are  included  in  the  firm. 

I  think,  therefore,  as  already  said,  that  the  question  is, 
whether  the  stipulations  in  the  deed  are  such  as  to  consti- 
tute a  partnership  quoad  third  persons,  and  to  determine 
that  question  we  must  look  to  the  terms  of  the  deed.  The 
material  stipulations,  as  it  seems  to  me,  are  the  following : 
the  trustees  are,  as  soon  as  possible,  to  convert  into  money 
such  parts  of  joint  property  of  the  two  Smiths  as  shall 
not  be  necessary  to  carry  on  the  said  business  (that  ex- 
cepted property  not  to  exceed  4,000/. )  ;  they  are  to  carry 
on  the  business  under  the  name  of  the  Stanton  Iron  Com- 
pany, for  which  purpose  they  are  clothed  with  all  the  powers 
proper  to  be  confided  to  the  managers  of  such  a  concern. 
It  is  agreed  that  after  paying  all  the  expenses  and  losses 
to  be  incurred  or  sustained  in  carrying  out  the  business, 
they  shall  pay  and  divide  the  net  income  of  the  said  busi- 
ness, remaining  after  answering  the  purposes  aforesaid, 
into  and  among  the  creditors  of  the  Smiths,  in  ratable 
proportions  according  to  the  amount  of  their  respective 
debts,  subject  to  the  provisions  thereinafter  contained.  The 
deed  then  provides  that  the  trustees  at  any  time  may,  and 
on  the  requisition  of  joint  creditors  whose  debts  together 
amount  to  3000/.,  must  call  a  meeting  of  the  creditors, 
and  that  the  decision  of  the  majority  of  such  meeting  shall 
have  full  power  for  the  general  benefit  of  the  creditors  to 


202  PARTNER'S  POWER  TO  BIND  COPARTNER 

give  any  directions  for  the  discontinuance  of  the  busi- 
ness, or  "for  the  present  or  future  management  thereof", 
which  shall  be  binding  on  all  the  creditors  whether  con- 
curring or  not.  The  Siiiifhs  have  no  vote  in  determining 
how  the  business  is  to  be  managed,  and  the  trustees  are 
absolutely  bound  to  obey  the  directions  of  the  meeting  of 
creditors.  If  the  concern  is  wound  up,  the  clear  residue  of 
the  monies,  after  paying  all  expenses,  shall  be  divided 
among  the  creditors  of  the  Smiths  ratably  as  joint  prop- 
erty. It  is  provided  that  where  the  debts  of  the  several 
creditors  are  paid  in  full  the  trustees  shall  make  over  the 
property  for  the  benefit  of  the  SniifJis,  and  this  clause  is 
to  be  noticed  as  being  the  only  clause  in  which  the  trusts 
are  for  the  benefit  of  the  Smiths,  except  so  far  as  they  are 
benefited  by  the  liquidation  of  their  debts.  And  it  is  to  be 
noticed  that,  from  its  nature,  it  can  only  come  into  opera- 
tion when  the  trade  of  the  Stoiifoii  Iron  Company  ceases. 
It  is  provided  amongst  other  things  that  every  creditor 
shall  have  a  right  at  all  times  to  inspect  the  books  of  the 
firm.  No  such  power  of  inspection  is  given  to  the  Smiths. 
Then  follows  a  provision  for  the  trustees,  "by  and  with  the 
consent  of  the  majority  of  creditors  in  value,  attending  any 
meeting  of  creditors,"  to  appoint  fresh  trustees  in  the  room 
of  those  retiring.  The  Smiths  have  no  voice  in  this.  Then 
follows  an  agreement  that  all  creditors  executing  or  be- 
coming otherwise  bound  by  the  deed  should  accept  its  pro- 
visions in  full  satisfaction  of  their  claims  upon  the  Smiths, 
and  that  in  case  any  of  them  sue  for  their  debts  that  this 
deed  may  be  pleaded  as  a  release. 

These,  I  think,  are  the  whole  of  the  material  parts  of 
the  deed.  There  is  no  stipulation  in  the  deed,  as  to  who 
is  to  provide  for  payment  of  the  partnership  liabilities  in 
case  the  losses  should  be  so  great,  as  to  exceed  the  sum  of 
4,000/.,  which  the  trustees  were  authorized  to  retain  for 
the  purpose  of  carrying  on  the  business.  The  parties  seem 
not  to  have  anticipated,  or  at  all  events  not  to  have  provided 
for  such  a  contingency,  which,  though  a  probable  one,  is 


cox  v.  HICKMAN  203 

often  overlooked  by  those  entering  on  a  trade,  but  the  rule 
of  law  is  clear  enough,  that  those  who  are  partners  in  the 
concern  must  bear  such  liabilities ;  so  that  I  once  more  re- 
peat, the  question  comes  round  to  whether  the  stipulations 
are  such  as  to  constitute  a  partnership  amongst  the  creditors. 

Now,  on  looking  at  the  provisions  of  the  deed,  it 
seems  to  me  that  they  are,  in  substance,  such  as  would  be 
proper  if  the  creditors  constituted  themselves  a  joint  stock 
company,  such  as  it  would  have  been  at  common  law,  and 
made  the  trustees  their  managing  directors,  but  agreed 
that  the  partnership  should  cease  as  soon  as  a  certain  sum, 
in  this  case  the  amount  of  their  debts,  was  realized.  I  find 
that  the  business  is  to  be  carried  on  by  the  trustees  under 
the  control  of  the  creditors,  who  may  give  what  directions 
they  think  fit  as  to  the  management  of  the  business ;  that 
the  creditors  are  to  have  a  voice  in  nominating  fresh  trus- 
tees in  case  they  are  changed ;  and  that  the  creditors  are 
to  have  a  right  to  inspect  the  books.  And  moreover,  I  find 
that  the  creditors  alone  are  to  have  these  powers,  no  similar 
powers  being  given  to  the  Smiths.  Then  I  find  also  that 
the  trustees  are  bound  to  pay  over  the  net  income,  after 
paying  all  expenses  of  the  concern,  ratably  among  the 
creditors.  It  was  suggested  at  your  Lordships'  bar,  that 
there  was  some  distinction  between  the  net  income,  after 
paying  all  out-goings,  and  the  net  profits,  but  I  am  unable 
to  understand  what  that  distinction  is. 

The  arrangement  is  that  the  trading  might  terminate 
on  the  creditors  being  paid,  which  perhaps  was  the  termina- 
tion which  the  persons  entering  into  the  arrangement  hoped 
for.  In  that  case,  the  deed  provides  that  the  property 
shall  be  made  over  to  the  Smiths,  but  by  so  doing  the  trade 
of  the  Stanton  Iron  Company  ceases.  Whoever  the  part- 
ners in  that  firm  might  be,  they  are  no  longer  to  carry  on 
the  business  after  the  property  is  assigned  to  the  Smiths. 
It  might  terminate  by  the  concern  being  stopped  by  the 
creditors  whilst  it  was  yet  solvent ;  that  event  is  anticipated 
by  the  deed,  and  in  that  case  it  is  provided  that  the  sur- 


204         PARTNER'S  POWER  TO  BIND  COPARTNER 

plus,  after  paying  all  losses,  should  be  divided  amongst  the 
creditors.  It  might  continue  for  an  indefinite  period,  nei- 
ther so  productive  as  to  pay  the  creditors  in  full,  nor  so  bad 
as  to  be  stopped;  and  whilst  it  was  so  continued,  the  cre- 
ditors were  to  have  the  net  income  or  profits,  and  the  con- 
trol of  the  management  of  the  concern,  and  they  were  only 
to  have  these  powers.  Does  this  make  them  interested  in  the 
property  or  profits,  so  as  to  make  them  partners?  That 
question  depends  on  the  effect  of  the  deed,  and  it  will  be 
answered  when  we  have  determined  the  extent  of  their  in- 
terest in  the  property  of  the  firm.  Suppose,  a  not  impos- 
sible case,  that  the  trustees  had,  as  individuals,  contracted 
a  joint  debt  for  some  purpose  unconnected  with  the  Stanton 
Iron  Company;  could  the  partnership  property  of  the 
Stanton  Iron  Company  have  been  taken  to  pay  the  debt? 
Or,  if  the  trustees  had  become  reduced  to  one  person,  and 
he  had  become  a  bankrupt,  would  the  assets  of  the  Stanton 
Iron  Company  have  passed  to  his  assignees?  Or  would 
the  creditors,  who  were  parties  to  the  deed  of  arrange- 
ment, have  been  entitled  in  either  case  to  say  that 
the  property  was  in  equity  theirs,  and  that  the  trustees, 
except  in  so  far  as  they  were  creditors,  had  no  beneficial 
interest  in  it?  That  is  a  question  that  depends  on  the 
construction  of  the  deed.  I  think  the  construction  of  the 
deed  is  such,  that  the  creditors,  parties  to  the  deed,  have 
bargained  that  they  shall  have  a  hold  over  the  whole  prop- 
erty of  the  firm,  divided  or  undivided,  and  I  think  this  bar- 
gain is  effectual,  and,  if  so,  that  the  creditors  do  take  the 
profits  of  the  concern,  so  as  to  make  them  their  property, 
before  they  are  divided. 

Th-e  deed  does  not  provide  what  is  to  be  done  In  the 
case  which  has  actually  happened,  viz.,  that  of  the  concern 
proving  insolvent ;  but  the  law  declares  that  those  who  take 
the  profits  of  a  trading  concern  as  such,  are  liable  to  the 
losses,  even  if  they  have  stipulated  to  the  contrary,  Waiigh 
V.  Carver  and  the  notes  thereto. 


cox  V.  HICKMAN  205 

The  phrase,  taking  the  profits  as  such,  is  not  a  happy 
one,  and  there  is  some  difficulty  at  times  in  defining  what 
it  means,  but  I  think  it  at  all  events  means  this :  it  is  not  pos- 
sible, according  to  the  common  law,  to  cause  a  trading  con- 
cern to  be  carried  on,  on  the  terms  that  the  advantages  of 
a  partnership,  including  the  participation  in  profits,  and  the 
partnership  lien  and  security  over  the  assets  of  the  firm, 
shall  belong  to  those  who  have  but  a  limited  liability.  I 
am  aware  of  no  case  or  authority  inconsistent  with  the 
proposition  thus  guarded.  Now,  it  seems  to  me,  that  the 
present  defendants  have,  by  the  deed  to  which  they  are 
parties,  stipulated  that  the  business  shall  be  carried  on  for 
their  benefit,  and  under  their  control ;  that  they  shall  be 
interested  in  all  the  property  of  the  firm  to  such  an  extent 
as  to  have  a  partnership  lien  upon  it.  This  shows  that 
they  are  not  merely  persons  permitting  the  Smiths  or  the 
trustees  to  carry  on  the  business,  and  relying  on  it  as  a 
fund  for  payment,  but  that  they  take  the  profits  as  such, 
and  having  done  so,  they  are  partners  as  regards  third 
persons.  I  agree  that  the  question  is  one  of  agency,  viz., 
whether  the  defendants  authorized  the  managers  of  this 
firm  to  bind  them,  but  I  think  it  is  an  incident  attached  by 
law  to  a  participation  in  the  profits  to  the  above  extent,  that 
such  authority  is  given  to  those  managing  the  concern.  I 
think,  for  the  reasons  I  have  given,  that  this  arrangement 
deed  does  amount  to  a  stipulation  for  a  participation  in 
the  profits  as  such  by  the  creditors. 

For  these  reasons,  I  am  of  opinion  that  the  defendants 
are  liable  as  acceptors  of  the  bills  of  exchange  declared 
upon. 

Mr.  Baron  Channell:^ 

The  provisions  of  the  deed  are  carefully  analyzed  and 
sufficiently  set  forth  in  the  judgment  of  the  Master  of  the 
Rolls,  which  is  with  the  papers  before  your  Lordships;  I 
refer  to  that  judgment  for  the  provisions  of  the  deed.     I 

*Only  a  portion  of  his  opinion  is  reprinted. 


206  PARTNER'S  POWER  TO  BIND  COPARTx\ER 

think  that  no  new  trade  or  concern  was  carried  on.  It 
seems  to  me,  that  it  was  the  old  concern,  though  carried  on 
under  the  management  of  trustees,  and  under  a  new  name; 
that  it  was  to  be  carried  on  by  parties  in  whom  the  Smiths 
on  the  one  hand,  and  the  general  body  of  creditors  on  the 
other  hand,  placed  confidence,  that  is  to  say,  by  the  trus- 
tees; but  that  it  was  the  business  of  the  Smiths;  that  the 
creditors  who  had  rights  against  the  Smiths,  which  they 
might  have  enforced  by  legal  proceedings,  in  effect,  in  con- 
sideration of  the  arrangement  that  the  trade  for  the  future 
should  be  carried  on  by  the  trustees,  and  not  under  the 
management  of  the  Smiths,  agreed  to  forego  their  ordinar}' 
rights,  as  creditors,  against  their  debtors,  and  to  receive  a 
sum  equivalent  to  what  was  the  amount  of  their  debts, 
when  the  net  profits  (that  is,  as  I  understand,  profits  made 
after  satisfying  all  new  debts),  should  enable  the  trustees 
to  pay  the  parties  of  the  tliird  part  such  equivalent  sum. 

The  business  was,  I  think,  the  business  of  the  Smiths, 
carried  on  with  a  view  to  their  ultimate  benefit ;  and  the 
fact,  that  the  creditors  had  power  to  put  an  end  to  the 
management  by  the  trustees,  and  to  discontinue  the  busi- 
ness, and  to  require  the  property,  the  capital,  to  be  sold 
and  divided  amongst  them  in  satisfaction  or  part  satisfac- 
tion of  monies,  which,  according  to  my  understanding  of 
the  deed,  and  by  virtue  of  the  deed  of  arrangement,  became 
a  charge  on  the  property  of  Messrs.  Smith,  does  not  vary 
the  case  so  as  to  constitute  the  creditors  of  the  third  part 
partners  in  the  business.  The  creditors  of  the  third  part 
had  no  power,  I  think,  by  virtue  of  the  deed  to  take  upon 
themselves  the  management  of  the  business. 

Supposing  that  I  am  wrong  in  considering  the  business 
carried  on  under  the  deed  as  the  old  business  under  a  new 
name,  and  that  the  business  is  to  be  considered  a  new 
business,  I  think  the  creditors,  parties  to  the  deed  of  the 
third  part,  may  be  likened  to  parties  who  had  made  loans 
to  the  new  partnership  to  the  extent  of  their  debts  against 
the  old  concern,   and  that  by  stipulating  to   receive  pay- 


cox  V.  HICKMAN  207 

ment  of  their  loans  out  of  the  net  profits,  the  amount  to  be 
received  not  varying  with  the  rate  of  the  net  profits  so  as 
to  give  them  any  interest  beyond  the  amount  of  their  loan, 
they  did  not  render  themselves  partners.  That  was  the 
view  taken  by  his  Honour  the  Master  of  the  Rolls  with 
reference  to  this  deed.  No  doubt  his  judgment  is  to  be 
considered  as  only  deciding  that  this  deed  did  not  consti- 
tute a  partnership  within  the  meaning  of  the  Winding-up 
Acts.  But  the  whole  reasoning  goes  to  show  that  in  the 
opinion  of  that  learned  Judge  there  was  no  partnership 
created  by  the  deed;  and  I  adopt  that  view.^ 

On  August  3rd.  The  Lord  Chancellor  (Lord  Camp- 
bell), and  Lords  Brougham.  Cranworth,  Wensleydale  and 
Chelmsford  voted  unanimously  to  reverse  the  judgment. 

Lord  Cranworth  ;•* 

I  do  not  propose  to  consider  in  detail  all  the  provisions 
of  the  deed.  I  think  it  sufficient  to  state  them  generally. 
In  the  first  place  there  is  an  assignment  by  Messrs.  Siiiifh 
to  certain  trustees  of  the  mines  and  all  the  engines  and 
machinery  used  for  working  them,  together  with  all  the 
stock  in  trade,  and  in  fact,  all  their  property,  upon  trust, 
to  carry  on  the  business,  and,  after  paying  its  expenses,  to 
divide  the  net  income  ratably  amongst  the  creditors  of 
Messrs.  Smith,  as  often  as  there  shall  be  funds  in  hand 
sufficient  to  pay  one  shilling  in  the  pound;  and,  after  all 
the  creditors  are  satisfied,  then  in  trust  for  jMessrs. 
Smith. 

Up  to  this  point  the  creditors,  though  they  executed 
the  deed,  are  merely  passive,  and  the  first  question  is,  what 
would  have  been  the  consequence  to  them  of  their  executing 
the  deed  if  the  trusts  had  ended  there?    Would  thev  have 


'The  opinions  of  Justices  Crompton  and  Williams  advising  that  the 
defendants  should  be  held  liable,  and  the  opinion  of  Mr.  Justice  Wight- 
man  and  Chief  Baron  Pollock  that  they  should  not  be  so  held  are 
omitted. 

*  A  portion  of  his  opinion  and  the  opinion  of  the  Lord  Chancellor  are 
omitted. 


208         PARTNER'S  POWER  TO  BIND  COPARTNER 

become  partners  in  the  concern  carried  on  by  the  trustees 
merely  because  they  passively  assented  to  its  being  carried 
on  upon  the  terms  that  the  net  income,  i.  c.  the  net  profits, 
should  be  applied  in  discharge  of  their  demands?  I  think 
not;  it  was  argued  that  as  they  would  be  interested  in  the 
profits,  therefore  they  would  be  partners.  But  this  is  a 
fallacy.  It  is  often  said  that  the  test,  or  one  of  the  tests, 
whether  a  person  not  ostensibly  a  partner,  is  nevertheless, 
in  contemplation  of  law,  a  partner,  is,  whether  he  is  en- 
titled to  participate  in  the  profits.  This,  no  doubt,  is,  in 
general,  a  sufficiently  accurate  test ;  for  a  right  to  partici- 
pate in  profits  affords  cogent,  often  conclusive  evidence, 
that  the  trade  in  which  the  profits  have  been  made,  was 
carried  on  in  part  for  or  on  behalf  of  the  person  setting  up 
such  a  claim.  But  the  real  ground  of  the  liability  is,  that 
the  trade  has  been  carried  on  by  persons  acting  on  his 
behalf.  When  that  is  the  case,  he  is  liable  to  the  trade 
obligations,  and  entitled  to  its  profits,  or  to  a  share  of 
them.  It  is  not  strictly  correct  to  say  that  his  right  to 
share  in  the  profits  makes  him  liable  to  the  debts  of  the 
trade.  The  correct  mode  of  stating  the  proposition  is  to 
say  that  the  same  thing  which  entitles  him  to  the  one 
makes  him  liable  to  the  other,  namely,  the  fact  that  the 
trade  has  been  carried  on  on  his  behalf,  i.  c,  that  he  stood 
in  the  relation  of  principal  towards  the  persons  acting 
ostensibly  as  the  traders,  by  whom  the  liabilities  have  been 
incurred,  and  under  whose  management  the  profits  have 
been  made. 

Taking  this  to  be  the  ground  of  liability  as  a  partner,  it 
seems  to  me  to  follow  that  the  mere  concurrence  of 
creditors  in  an  arrangement  under  which  they  permit  their 
debtor,  or  trustees  for  their  debtor,  to  continue  his  trade, 
applying  the  profits  in  discharge  of  their  demands,  does  not 
make  them  partners  with  their  debtor,  or  the  trustees.  The 
debtor  is  still  the  person  solely  interested  in  the  profits, 
save  only  that  he  has  mortgaged  them  to  his  creditors. 
He  receives  the  benefit  of  the  profits  as  they  accrue,  though 


cox  V.  HICK^IAN  2U9 

he  has  preckided  himself  from  applying  them  to  any  other 
purpose  than  the  discharge  of  his  debts.  The  trade  is  not 
carried  on  by  or  on  account  of  the  creditors ;  though  their 
consent  is  necessary  in  such  a  case,  for  without  it  all  the 
property  might  be  seized  by  them  in  execution.  But  the 
trade  still  remains  the  trade  of  the  debtor  or  his  trustees; 
the  debtor  or  the  trustees  are  the  persons  by  or  on  behalf 
of  whom  it  is  carried  on. 

I  have  hitherto  considered  the  case  as  it  would  have 
stood  if  the  creditors  had  been  merely  passively  assenting 
parties  to  the  carrying  on  of  the  trade,  on  the  terms  that 
the  profits  should  be  applied  in  liquidation  of  their  demands. 
But  I  am  aware  that  in  this  deed  special  powers  are  given 
to  the  creditors,  which,  it  was  said,  showed  that  they  had 
become  partners,  even  if  that  had  not  been  the  consequence 
of  their  concurrence  in  the  previous  trust.  The  powers 
may  be  described  briefly  as,  first,  a  power  of  determining 
by  a  majority  in  value  of  their  body,  that  the  trade  should 
be  discontinued,  or,  if  not  discontinued,  then,  secondly,  a 
power  of  making  rules  and  orders  as  to  its  conduct  and 
management. 

These  powers  do  not  appear  to  me  to  alter  the  case. 
The  creditors  might,  by  process  of  law,  have  obtained  pos- 
session of  the  whole  of  the  property.  By  the  earlier  pro- 
visions of  the  deed,  they  consented  to  abandon  that  right, 
and  to  allow  the  trade  to  be  carried  on  by  the  trustees. 
The  effect  of  these  powers  is  only  to  qualify  their  consent. 
.They  stipulate  for  a  right  to  withdraw  it  altogether;  or,  if 
not,  then  to  impose  terms  as  to  the  mode  in  wdiich  the 
trusts  to  which  they  had-  agreed  should  be  executed ;  I  do 
not  think  that  this  alters  the  legal  condition  of  the  credi- 
tors. The  trade  did  not  become  a  trade  carried  on  for 
them  as  principals,  because  they  might  have  insisted  on 
taking  possession  of  the  stock,  and  so  compelling  the  aban- 
donment of  the  trade,  or  because  they  might  have  pre- 
scribed terms  on  which  alone  it  should  be  continued.  Any 
trustee  miglit  have  refused  to  act  if  he  considered  the  terms 


210  PARTNER'S  POWER  TO  BIND  COPARTNER 

prescribed  by  the  auditors  to  be  objectionable.  Suppose 
the  deed  had  stipulated,  not  that  the  creditors  might  order 
the  discontinuance  of  the  trade,  or  impose  terms  as 
to  its  management,  but  that  some  third  person  might 
do  so,  if,  on  inspecting  the  accounts,  he  should  deem  it 
advisable,  it  could  not  be  contended  that  this  would  make 
the  creditors  partners,  if  they  were  not  so  already;  and  I 
can  see  no  difference  between  stipulating  for  such  a  power 
to  be  reserved  to  a  third  person,  and  reserving  it  to  them- 
selves. 

I  have,  on  these  grounds,  come  to  the  conclusion  that 
the  creditors  did  not,  by  executing  this  deed,  make  them- 
selves partners  in  the  Stanton  Iron  Company,  and  I  must 
add  that  a  contrary  decision  would  be  much  to  be  depre- 
cated. Deeds  of  arrangement  like  that  now  before  us,  are, 
I  believe,  of  frequent  occurrence;  and  it  is  impossible  to 
imagine  that  creditors  who  execute  them,  have  any  notion 
that  by  so  doing  they  are  making  themselves  liable  as  part- 
ners. This  would  be  no  reason  for  holding  them  not  to  be 
liable,  if,  on  strict  principles  of  mercantile  law,  they  are 
so;  but  the  very  fact  that  such  deeds  are  so  common,  and 
that  no  such  liability  is  supposed  to  attach  to  them,  affords 
some  argument  in  favour  of  the  Appellant.  The  deed 
now  before  us  was  executed  by  above  a  hundred  joint  cre- 
ditors; and  a  mere  glance  at  their  names  is  sufficient  to 
show  that  there  was  no  intention  on  their  part  of  doing 
anything  which  should  involve  them  in  the  obligations  of 
a  partnership.  I  do  not  rely  on  this;  but,  at  least,  it 
shows  the  general  opinion  of  the  mercantile  world  on  the 
subject.  I  may  remark  that  one  of  the  creditors  I  see 
is  the  Midland  Railway  Company,  which  is  a  creditor  for 
a  sum  only  of  39/.,  and  to  suppose  that  the  directors  could 
imagine  that  they  were  making  themselves  partners  is 
absurd. 

The  authorities  cited  in  argument  did  not  throw  much 
light  upon  the  subject.  I  can  find  no  case  in  which  a  per- 
son has  been  made  liable  as  a  dormant  or  sleeping  partner, 


cox  z:  HICKMAN  211 

where  the  trade  might  not  fairly  be  said  to  have  been 
carried  on  for  him,  together  with  those  ostensibly  con- 
ducting it,  and  when,  therefore,  he  would  stand  in  the  posi- 
tion of  principal  towards  the  ostensible  members  of  the 
firm  as  his  agents.  This  was  certainly  the  case  in  Wangh 
V.  Carver.  There  Messrs.  Carver,  who  were  ship  agents 
at  Portsmouth,  agreed  with  Gicsler,  a  ship  agent  at 
Plymouth,  that  if  he  would  establish  himself  as  a  ship 
agent  at  Cozues,  they  would  share  between  them  the  profits 
of  their  respective  agencies  in  certain  stipulated  propor- 
tions. When,  therefore,  Gicsler,  in  pursuance  of  the  agree- 
ment, did  establish  himself  at  Con'cs,  and  there  carry  on 
the  business  of  a  ship  agent,  he  in  fact,  carried  it  on  for 
the  benefit  of  Messrs.  Carver  as  well  as  of  himself;  and  the 
Court  held  that,,  in  these  circumstances,  the  stipulation  which 
they  had  entered  into  that  neither  party  to  the  agree- 
ment should  be  answerable  for  the  acts  of  the  other,  was 
a  stipulation  which  they  could  not  make  so  as  thereby  to 
affect  third  persons.  Each  firm  was  carrying  on  business 
on  account,  not  only  of  itself  but  also  of  the  other  firm; 
this,  therefore,  made  each  firm  the  agent  of  the  other. 

Lord  Wensleydale  :^ 

A  man  who  allows  another  to  carry  on  trade,  whether 
in  his  own  name  or  not,  to  buy  and  sell,  and  to  pay  over 
all  the  profits  to  him,  is  undoubtedly  the  principal,  and  the 
person  so  employed  is  the  agent,  and  the  principal  is  liable 
for  the  agent's  contracts  in  the  course  of  his  employment. 
So  if  two  or  more  agree  that  they  should  carry  on  a  trade, 
and  share  the  profits  of  it,  each  is  a  principal,  and  each  is 
an  agent  for  the  other,  and  each  is  bound  by  the  other's 
contract  in  carr^nng  on  the  trade,  as  much  as  a  single 
principal  would  be  by  the  act  of  an  agent,  who  was  to  give 
the  whole  of  the  profits  to  his  employer.  Hence  it  be- 
comes a  test  of  the  liability  of  one  for  the  contract  of 
another,  that  he  is  to  receive  the  whole  or  a  part  of  the 

°A  portion  of  his  opinion  is  omitted. 


212  PARTNER'S  POWER  TO  BIND  COPARTNER 

profits  arising  from  that  contract  by  virtue  of  the  agree- 
ment made  at  the  time  of  the  employment.  I  beheve  this 
is  the  true  principle  of  partnership  liability.  Perhaps  the 
maxim  that  he  who  partakes  the  advantage  ought  to  bear 
the  loss,  often  stated  in  the  earlier  cases  on  this  subject,  is 
only  the  consequence,  not  the  cause,  why  a  man  is  made 
liable  as  a  partner. 

Can  we  then  collect  from  the  trust  deed  that  each  of 
the  subscribing  creditors  is  a  partner  with  the  trustees 
and  by  the  mere  signature  of  the  deed  constitutes  them 
his  agents  for  carrying  on  the  business  on  the  account  of 
himself  and  the  rest  of  the  creditors?  I  think  not.  It  is 
true  that  by  this  deed  the  creditors  will  gain  an  advantage 
by  the  trustees  carrying  on  the  trade;  for  if  it  is  profitable, 
they  may  get  their  debts  paid;  but  this  is  not  that  sharing 
of  profits  which  constitutes  the  relation  of  principal,  agent, 
and  partner. 

If  a  creditor  were  to  agree  with  his  debtor  to  give  the 
latter  time  to  pay  his  debt  till  he  got  money  enough  out  of 
his  trade  to  pay  it,  I  think  no  -one  could  reasonably  con- 
tend that  he  thereby  made  him  his  agent  to  contract  debts 
in  the  way  of  his  trade ;  nor  do  I  think  that  it  would  make 
any  difference  that  he  stipulated  that  the  debtor  should  pay 
the  debt  out  of  the  profits  of  the  trade. 

The  deed  in  this  case  is  merely  an  arrangement  by  the 
SniitJis  to  pay  their  debts,  partly  out  of  the  existing  funds, 
and  partly  out  of  the  expected  profits  of  their  trade;  and 
all  their  effects  are  placed  in  the  hands  of  the  trustees,  as 
middlemen  between  them  and  their  creditors,  to  effect  the 
object  of  the  deed,  the  payment  of  their  debts.  These  effects 
are  placed  in  the  hands  of  the  trustees  as  the  property  of 
the  Smiths,  to  be  employed  as  the  deed  directs,  and  to  be 
returned  to  them  when  the  trusts  are  satisfied.  I  think 
it  is  impossible  to  say  that  the  agreement  to  receive  this 
debt,  so  secured,  partly  out  of  the  existing  assets,  partly  out 
of  the  trade,  is  such  a  participation  of  profits  as  to  con- 


cox  :■.  HICKMAX  213 

stitute  the  relation  of  principal  and  agent  between  the  cre- 
ditors and  trustees.^ 


^Compare:  Kilshazi'  v.  Jukes,  3  B.  &  Sm.  847,  1863.  (A  and  B  were 
indebted  to  C.  A,  B  and  C  entered  into  an  agreement  by  which  they 
agreed  to  jointly  purchase  land;  A  and  B  to  erect  houses  thereon;  C 
to  furnish  the  iron  and  receive  from  the  sale  of  the  houses  the  amount 
of  A  and  B's  original  indebtedness  to  him  and  the  price  of  the  iron. 
A,  B  and  C  purchased  the  land  from  D  and  agreed  with  D  to  erect 
certain  houses.  In  erecting  the  houses  A  and  B  contracted  a  debt  for 
lumber  with  E.  E  brought  suit  on  this  debt  against  C  as  a  partner  of 
A  and  B.  The  jury  found  a  verdict  for  the  defendant.  A  rule  to  show 
cause  why  this  verdict  should  not  be  set  aside  was  discharged  by  the 
vote  of  Mellor  and  Blackburn,  JJ. ;  Wightman,  J.,  contra.  Mellor 
follows  Cox  V.  Hickman;  Blackburn  believed  that  the  evidence  of  the 
contract  with  D  was  sufficient  to  have  supported  a  verdict  for  the  plain- 
tiff, but  was  not  sufficient  to  warrant  the  verdict  for  the  defendant  being 
set  aside.) 

Bullen  V.  Sharp,  L.  R..  i  C.  P.  86,  1S65.  _  (B  agreed  with  F  that  F 
should  manage  his,  B's,  business  of  marine  insurance,  B  to  do  nothing 
in  the  business  without  consent  of  F.  A  advanced  to  B  £5,000  to  be  used 
in  B's  business.  B  agreed  to  repay  A  at  all  events,  to  pay  A  annually 
£500,  or  a  sum  equal  to  one-fourth  the  net  annual  profits  of  the  business. 
Afterwards  B  agreed  in  addition  to  pay  A  et  al.  all  the  profits  of  the 
business  to  be  held  in  trust  by  A  ct  al.;  first  to  pay  A  £500;  second,  to 
pay  B  £500;  third,  to  accumulate  the  surplus  until  it  reached  £8,500  as  a 
fund  to  insure  against  losses  in  the  business;  fourth,  if  the  sum  of 
£8,500  remained  intact  for  two  years  to  pay  A  £5,000,  the  balance  to  be 
for  the  benefit  of  B's  wife  and  children.  A  was  sued  on  a  debt  incurred 
in  the  course  of  the  business  as  a  partner.  Held,  that  the  fact  that  A 
received  all  the  profits  on  certain  trusts  did  not  make  him  a  partner; 
that  A  was  not  a  partner  because  he  had  a  lien  on  the  profits  for  a 
repayment  of  the  money  he  advanced ;  that  the  fact  that  F  was  the 
person  who  conducted  the  business,  and  that  F  was  practically  selected 
by  A,  while  a  fact  from  which  a  jury  could  infer  that  the  whole  arrange- 
ment was  a  cloak  to  hide  A's  ownership  of  the  business  was  also  con- 
sistent with  a  distrust  of  B's  steadiness  and  a  desire  on  the  part  of  a 
creditor  to  secure  a  careful  management  of  the  business,  and  that  as 
this  case  had  been  left  to  the  judges  with  power  to  draw  necessary 
inferences  of  fact,  fraud  should  not  be  inferred  where  another  inference 
was  possible.  Per  Blackburn.  J.,  Channel!,  B.,  and  Bramwell,  B. ;  dis- 
senting, Shee,  J.,  and  Pigott,  B. 


214  PARTNER'S  POWER  TO  BIND  COPARTNER 


MOLLWO,  MARCH  &  CO.  v.  THE  COURT  OF 
WARDS. 

In  the  Privy  Council,  1872. 

Lazv  Reports,  4  Privy  Council  Appeal  Cases,  419.* 

Sir  Montague  Smith  : 

The  action  which  gives  occasion  to  this  appeal  Avas 
brought  by  the  Plaintiffs  (the  Appellants),  Merchants  of 
London,  against  the  late  Rajah  Pertah  Chnnder  Sing,  to 
recover  a  balance  of  nearly  three  lacs  of  rupees  claimed  to 
be  due  to  them  from  the  firm  of  W.  N.  Watson  S  Co.,  of 
Calcutta. 

The  Rajah  having  died  during  the  pendency  of  the 
suit,  the  defence  was  continued  by  the  Respondent,  the 
Court  of  Wards,  on  behalf  of  his  minor  heir. 

The  Plaintiff  alleged  that  the  Firm  of  IV.  N.  Watson 
&  Co.  consisted  of  William  Nod  Watson,  Thomas  Ogilvie 
Watson,  and  the  Rajah,  and  sought  to  make  the  Rajah  liable 
as  a  Partner  in  it. 

It  may  be  assumed,  although  the  exact  amount  is  a 
question  in  dispute  in  the  appeal,  that  a  large  balance  be- 
came due  from  the  Firm  to  the  Plaintiffs  during  the  time 
when  it  is  contended  that  the  Rajah  was  in  partnership  with 
the  two  Watsons. 

The  questions  in  the  appeal  depend,  in  the  main,  on  the 
construction  and  effect  of  a  written  Agreement  entered  into 
between  the  Watsons  and  the  Rajah;  but  it  will  be  neces- 
sary to  advert  to  some  extrinsic  facts  to  explain  the  circum- 
stances under  which  it  was  made  and  acted  on. 

The  two  Watsons  commenced  business  in  partnership, 
as  Merchants  at  Calcutta,  in  1862,  under  the  Firm  of  W.  N. 
Watson  &  Co.     Their  transactions  consisted  principally  in 


^  The  Reporter's  statement  of  the  facts,  and  his  notes  of  the  argument 
of  counsel  are  omitted. 


MOLLWO,  ^lARCH  &  CO.  v.  THE  COURT  OF  WARDS    215 

making  consignments  of  goods  to  Merchants  in  England, 
and  receiving  consignments  from  them. 

In  January,  1863,  they  entered  into  an  agreement  with 
the  Plaintiffs  regulating  the  terms  on  which  consignments 
were  to  be  made  between  them,  and  under  which  W-.  N. 
IP^atson  &  Co.  were  authorized,  within  certain  limits,  to 
draw  on  the  Plaintiffs  in  London  against  consignments. 

The  Watsons  had  little  or  no  capital.  The  Rajah  sup- 
ported them,  and  in  1862  and  1863  ^^^  made  large  advances 
to  enable  them  to  carry  on  their  business,  partly  in  cash,  but 
chiefly  by  accepting  Bills,  for  which  the  Watsons  obtained 
discount,  and  which  the  Rajah  met  at  maturity.  In  the  mid- 
dle of  1863  the  total  amount  of  these  advances  was  consid- 
erable, and  the  Rajah  desired  to  have  security  for  his  debt, 
and  for  any  future  advances  he  might  make,  and  also  wished 
to  obtain  some  control  over  the  business  by  whicli  he  might 
check  what  he  considered  to  be  the  excessive  trading  of  the 
Watsons. 

Accordingly,  an  agreement  was  entered  into  on  the 
27th  of  August,  1863,  between  the  Rajah  of  the  one  part, 
and  "Messrs.  W.  N.  Watson  &  Co."  of  the  other  part,  by 
which,  in  consideration  of  money  already  advanced,  and 
which  might  be  thereafter  advanced  by  the  Rajah  to  them, 
the  Watsons  agreed  to  carry  on  their  business  subject  to  the 
control  of  the  Rajah  in  several  important  particulars,  which 
will  be  hereafter  adverted  to.  They  further  agreed  to,  and 
in  fact  did,  hand  over  to  him  "as  security"  the  title  deeds  of 
certain  tea  plantations,  and  they  also  agreed,  that  "as  fur- 
ther security"  all  their  other  property,  landed  or  otherwise, 
including  their  stock  in  trade,  should  be  answerable  for  the 
debt  due  to  him. 

The  loth  and  13th  clauses  of  the  Agreement  were  as 
follows : 

"loth.  In  consideration  of  the  said  advances  made,  and 
the  liability  incurred  as  aforesaid  by  the  Rajah,  and  in  con- 
sideration of  any  future  advances  which  may  be  made  bv 
him,  the  Firm  agrees  that  he  shall  receive   from  them  a 


216         PARTNER'S  POWER  TO  BIND  COPARTNER 

commission  of  20  per  cent,  on  all  net  profits  made  by  the 
Firm  from  time  to  time,  commencing  from  the  ist  of  May, 
1S62,  or  until  such  time  as  the  whole  amount  of  the  debt 
due  to  him  shall  be  paid  ofT,  and  the  liability  so  incurred  by 
him  as  aforesaid  shall  be  wholly  extinguished. 

"13th.  The  Firm  shall  in  addition  to  the  said  commis- 
sion pay  to  the  Rajah  interest  at  the  rate  of  12  per  cent,  per 
annum  upon  all  cash  advances  which  have  been  or  are  to  be 
l:ereafter  made  by  him  to  the  Firm,  and  shall  also  pay  to 
the  banks  all  discount  and  interest  now  as  hereafter  payable 
on  the  said  acceptance." 

This  Agreement  is  not  signed  by  the  Rajah,  but  he  was 
undoubtedly  an  assenting  party  to  it. 

Subsequently  to  the  Agreement,  the  Rajah  made  fur- 
ther advances,  and  the  amount  due  to  him  ultimately  ex- 
ceeded three  lacs  of  rupees. 

In  1864  and  1865,  the  Firm  of  IV.  N.  Watson  &  Co. 
fell  into  difficulties.  An  arrangement  was  then  made  under 
which  the  Rajah,  upon  the  JJ^atsoiis  executing  to  him  a  for- 
mal mortgage  of  the  tea  plantations,  to  secure  the  amount 
of  his  advances,  released  to  them,  by  a  Deed  bearing  date 
the  3rd  of  March,  1865,  all  right  to  commission  and  interest 
under  the  Agreement  of  August,  1863,  and  all  other  claims 
against  them. 

In  point  of  fact,  the  Rajah  up  to  this  time  had  never 
received  possession  of  any  of  the  property  or  moneys  of  the 
Firm,  nor  any  of  the  proceeds  of  the  business,  and  did  not 
in  fact  receive  any  commission.  A  sum  of  Rs. 27,000.  on 
this  account  was,  indeed,  on  the  30th  of  September,  1863, 
placed  to  his  credit  in  the  Books  of  the  Firm  in  a  separate 
account  opened  in  his  name,  but  the  sum  so  credited  was 
never  paid  to  him.  and  was  subsequently  "written  back"  by 
the  JJ^atso)is. 

Some  evidence  was  given  as  to  the  extent  of  the  inter- 
ference of  the  Rajah  in  the  control  of  the  business.  It  seems 
the  Rajah  knew  little  of  its  details,  and  it  is  unnecessary  to 
go,  with  any  minuteness,  into  the  facts  on  this  part  of  the 


AIOLLWO,  MARCH  &  CO.  z:  THE  COURT  OF  WARDS     217 

case;  for  it  was  conceded  that  the  Rajah  availed  himself 
only  in  a  slight  degree  of  the  powers  of  control  conferred 
upon  him  by  the  agreement;  in  fact,  that  he  did  not  more, 
but  much  less,  than  he  might  have  done  under  it,  so  that  the 
question  really  turns  on  the  effect  of  the  contract  itself.  .-The 
subsequent  acts  of  the  Rajah  do  not  in  any  way  add  to  or 
enlarge  his  liability. 

Before  proceeding  to  the  main  questions  which  have 
been  argued  in  the  appeal,  it  may  be  as  well  to  clear  the  way 
for  their  consideration  by  saying  that  no  liability  can  in  this 
case  be  fastened  upon  the  Rajah  on  the  ground  that  he  was 
an  ostensible  partner,  and,  therefore,  liable  to  third  persons 
as  if  he  was  a  real  partner.  It  is  admitted  that  he  did  not  so 
hold  himself  out ;  and  that  a  statement  made  by  one  of  the 
JJ'atsoiis  to  the  Plaintiffs,  to  the  effect  that  he  might  be  in 
law  a  partner,  by  reason  of  his  right  to  commission  on  pro- 
fits, was  not  authorized  by  the  Rajah. 

The  liability,  therefore,  of  the  Rajah  for  the  debts 
contracted  by  W.  N.  ]  Vat  son  &  Co.  must  depend  on  his  real 
relation  to  that  Firm  under  the  agreement. 

It  was  contended,  for  the  Appellants,  that  he  was  so 
liable : 

First,  because  he  became  by  the  Agreement,  at  least  as 
regards  third  persons,  a  Partner  with  the  JVatsons ;  and 

Secondly,  because,  if  not  "a  true  partner"  (the  phrase 
used  by  Mr.  Lindlcy  in  his  argument),  the  JVatsons  were 
the  Agents  of  the  Rajah  in  carrying  on  the  business ;  and  the 
debt  to  the  Plaintiffs  was  contracted  within  the  scope  of  their 
agency. 

The  case  has  been  argued  in  the  Courts  of  India  and  at 
their  Lordships'  Bar,  on  the  basis  that  the  law  of  England 
relating  to  partnerships  should  govern  the  decision  of  it. 
Their  Lordships  agree  that,  in  the  absence  of  any  law  or 
well-established  custom  existing  in  India  on  the  subject, 
English  law  may  properly  be  resorted  to  in  mercantile  affairs 
for  principles  and  rules  to  guide  the  Courts  in  that  Country 
to  a  right  decision.     But  whilst  this  is  so,  it  should  be  ob- 


218         PARTNER'S  POWER  TO  BIND  COPARTNER 

served  that  in  applying  them,  the  usages  of  trade  and  habits 
of  business  of  the  people  of  India,  so  far  as  they  may  be 
peculiar,  and  differ  from  those  in  England,  ought  to  be 
borne  in  mind. 

The  Agreement,  on  the  face  of  it,  is  an  arrangement 
between  the  Rajah,  as  Creditor,  and  the  Firm  consisting  of 
the  two  Watsons,  as  Debtors,  by  which  the  Rajah  obtained 
security  for  his  past  advances;  and  in  consideration  of  for- 
bearance, and  as  an  inducement  to  him  to  support  the  Wat- 
sons by  future  advances,  it  was  agreed  that  he  should  receive 
from  them  a  commission  of  20  per  cent,  on  profits,  and 
should  be  invested  with  the  powers  of  supervision  and  con- 
trol above  referred  to.  The  primary  object  was  to  give 
security  to  the  Rajah  as  a  Creditor  of  the  firm. 

It  was  contended  at  the  Bar,  that  whatever  may  have 
been  the  intention,  a  participation  in  the  net  profits  of  the 
business  was,  in  contemplation  of  law,  such  cogent  evidence 
of  partnership  that  a  presumption  arose  sufficient  to  estab- 
lish, as  regards  third  parties,  that  relation,  unless  rebutted 
by  other  circumstances. 

It  appears  to  their  Lordships  that  the  rule  of  construc- 
tion involved  in  this  contention  is  too  artificial ;  for  it  takes 
one  term  only  of  the  contract  and  at  once  raises  a  presump- 
tion upon  it.  Whereas  the  whole  scope  of  the  agreement, 
and  all  its  terms,  ought  to  be  looked  at  before  any  presump- 
tion of  intention  can  properly  be  made  at  all. 

It  certainly  appears  to  have  been  at  one  time  under- 
stood that  some  decisions  of  the  English  Courts  had  estab- 
lished, as  a  positive  rule  of  law,  that  participation  in  the  net 
profits  of  a  business  made  the  participant  liable  as  a  partner 
to  third  persons.  (See  this  pointedly  stated  by  Mr.  Justice 
Blackburn,  in  Bullcn  v.  Sharp  [Law  Rep.  i  C.  P.  109].) 
The  rule  had  been  laid  down  with  distinctness  by  Eyre,  C.J., 
in  Waugh  v.  Carver  [2  H.  Bl.  235],  and  the  reason  of  the 
rule  the  Chief  Justice  thus  states :  "Upon  the  principle  that, 
by  taking  a  part  of  the  profits,  he  takes  from  the  Creditors  a 
part  of  that  fund  which  is  the  proper  security  to  them  for 


MOLLWO,  MARCH  &  CO.  v.  THE  COURT  OF  WARDS    219 

the  payment  of  their  debts.  That  was  the  foundation  of 
Grace  v.  Smith  [2  W.  Bl.  998 j,  and  we  think  it  stands  upon 
fair  grounds  of  reason." 

The  rule  was  evidently  an  arbitrary  one,  and  subsequent 
discussion  has  led  to  the  rejection  of  the  reason  for, it  as 
unsound.  Whilst  it  was  supposed  to  prevail,  much  hardship 
arose  from  its  application,  and  a  distinction,  equally  arbi- 
trary, was  established  between  a  right  to  participate  in  profits 
generally  "as  such,"  and  a  right  to  a  payment  by  way  of 
salary  or  commission  "in  proportion"  (to  use  the  words  of 
Lord  Eldon)  "to  a  given  quantum  of  the  profits." 

The  distinction  was  stated  to  be  "clearly  settled"  and 
was  acted  upon  by  Lord  Eldon  in  Ex  parte  Hamper  [17 
Ves.  412],  and  in  other  cases.  It  was  also  affirmed  and 
acted  on  in  Pott  v.  Eyton  [3  C.  B.  32],  where  Tindal,  C.J., 
in  giving  the  judgment  of  the  Court,  adopts  the  rule  as  laid 
down  by  Lord  Eldon,  and  says,  "Nor  does  it  appear  to  make 
any  difference  whether  the  money  is  received  by  way  of 
interest  on  money  lent,  or  wages,  or  salary  as  Agent,  or 
commission  on  sales  [Ibid.  40]." 

The  present  case  appears  to  fall  within  this  distinction. 
The  Rajah  was  not  entitled  to  a  share  of  the  profits  "as 
such ;"  he  had  no  specific  property  or  interest  in  them  qua 
profits,  for,  subject  to  the  powers  given  to  the  Rajah  by  way 
of  security,  the  Jl^atsons  might  have  appropriated  or  assigned 
the  whole  profits  without  any  breach  of  the  agreement.  The 
Rajah  was  entitled  only  to  commission,  or  a  payment  equal 
in  proportion  to  one-fifth  of  their  amount. 

This  distinction  has  always  been  admitted  to  be  thin, 
but  it  may  be  observed  that  the  supposed  rule  itself  was 
arbitrary  in  the  sense  of  being  imposed  by  law  and  of  being 
founded  on  an  assumption  opposed  in  many  cases  to  the  real 
relation  of  the  parties ;  and  when  the  law  thus  creates  a  rule 
of  liability  and  a  distinction  both  equally  arbitrary,  the  dis- 
tinction which  protects  from  liability  is  entitled  to  as  much 
weight  as  the  rule  which  imposes  it. 

But  the  necessity  of  resorting  to  these  fine  distinctions 


220         PARTNER'S  POWER  TO  BIXD  COPARTNER 

has  been  greatly  lessened  since  the  presumption  itself  lost 
the  rigid  character  it  was  supposed  to  possess' after  the  full 
exposition  of  the  law  on  this  subject  contained  in  the  judg- 
ment of  the  House  of  Lords  in  Cox  v.  Hickman  [8  H.  L.  C. 
268]  and  the  cases  which  have  followed  that  decision.  It 
was  contended  that  these  cases  did  not  overrule  the  previous 
ones.  This  may  be  so,  and  it  may  be  that  JVaugJi  v.  Carver 
[2  H.  Bl.  235],  and  others  of  the  former  cases,  were  rightly 
decided  on  their  own  facts;  but  the  judgment  in  Cox  v. 
Hickuian  had  certainly  the  effect  of  dissolving  the  rule  of 
law  which  had  been  supposed  to  exist,  and  laid  down  prin- 
ciples of  decision  by  which  the  determination  of  cases  of 
this  kind  is  made  to  depend,  not  on  arbitrary  presumptions  of 
law,  but  on  the  real  contracts  and  relations  of  the  parties. 
It  appears  to  be  now  established  that  although  a  right  to 
participate  in  the  profits  of  trade  is  a  strong  test  of  partner- 
ship, and  that  there  may  be  cases  where,  from  such  percep- 
tion alone,  it  may,  as  a  presumption,  not  of  law  but  of  fact, 
be  inferred ;  yet  that  whether  that  relation  does  or  does  not 
exist  must  depend  on  the  real  intention  and  contract  of  the 
parties. 

It  is  certainly  difficult  to  understand  the  principle  on 
which  a  man  who  is  neither  a  real  nor  ostensible  Partner 
can  be  held  liable  to  a  Creditor  of  the  Firm.  The  reason 
given  in  Grace  v.  Smith,  that  by  taking  part  of  the  profits 
he  takes  part  of  the  fund  which  is  the  proper  security  of  the 
Creditors,  is  now  admitted  to  be  unsound  and  insufficient  to 
support  it ;  for  of  course  the  same  consequences  might  follow 
in  a  far  greater  degree  from  the  mortgage  of  the  common 
property  of  the  firm,  which  certainly  would  not  of  itself 
make  the  Mortgagee  a  Partner. 

Where  a  man  holds  himself  out  as  a  Partner,  or  allows 
others  to  do  It,  the  case  is  wholly  different.  He  is  then 
properly  estopped  from  denying  the  character  he  has  as- 
sumed, and  upon  the  faith  of  which  Creditors  may  be  pre- 
sumed to  have  acted.  A  man  so  acting  may  be  rightly  held 
liable  as  a  Partner  by  estoppel. 


MOLLWO,  MARCH  &  CO.  v.  THE  COURT  OF  WARDS    221 

Again,  wherever  the  agreement  between  parties  creates 
a  relation  which  is  in  substance  a  partnership,  no  mere 
words  of  declarations  to  the  contrary  will  prevent,  as  re- 
gards third  persons,  the  consequences  flowing  from  the  real 
contract. 

Numerous  definitions  by  text-writers  of  what  consti- 
tutes a  partnership  are  collected  at  the  end  of  the  introduc- 
tion to  Mr.  Lindlcy's  excellent  Treatise  on  this  subject. 
Their  Lordships  do  not  think  it  necessary  to  refer  particu- 
larly to  any  of  them,  or  to  attempt  to  give  a  general  defini- 
tion to  meet  all  cases.  It  is  sufficient  for  the  present  deci- 
sion to  say,  that  to  constitute  a  partnership  the  parties  must 
have  agreed  to  carry  on  business  and  to  share  profits  in  some 
w^ay  in  common. 

It  was  strongly  urged,  that  the  large  powders  of  control, 
and  the  provisions  for  empowering  the  Rajah  to  take  pos- 
session of  the  consignments  and  their  proceeds,  in  addition 
to  the  commission  on  net  profits,  amounted  to  an  agreement 
of  this  kind,  and  that  the  Rajah  was  constituted,  in  fact,  the 
managing  Partner. 

The  contract  undoubtedly  confers  on  the  Rajah  large 
powers  of  control.  Whilst  his  advances  remained  unpaid, 
the  Watsons  bound  themselves  not  to  make  shipments,  or 
order  consignments,  or  sell  goods,  without  his  consent.  No 
money  was  to  be  drawn  from  the  Firm  without  his  sanction, 
and  he  was  to  be  consulted  with  regard  to  the  office  business 
of  the  Firm,  and  he  might  direct  a  reduction  or  enlargement 
of  the  establishment.  It  was  also  agreed  that  the  shipping 
documents  should  be  at  his  disposal,  and  should  not  be  soKl 
or  hypothecated,  or  the  proceeds  applied,  without  his  con- 
sent; and  that  all  the  proceeds  of  the  business  should  be 
handed  to  him,  for  the  purpose  of  extinguishing  his  debt. 

On  the  other  hand,  the  Rajah  had  no  initiative  power; 
he  could  not  direct  what  shipments  should  be  made  or  con- 
signments ordered,  or  what  should  be  the  course  of  trade. 
He  could  not  require  the  JVatsoiis  to  continue  to  trade,  or 
even  to  remain  in  partnership;  his  powers,  however  large, 


222         PARTNER'S  POWER  TO  BIND  COPARTNER 

were  powers  of  control  only.  No  doubt  he  might  have  laid 
his  hands  on  the  proceeds  of  the  business;  and  not  only  so, 
but  it  was  agreed  that  all  their  property,  landed  and  other- 
wise, should  be  answerable  to  him  as  security  for  his  debt. 

Their  Lordships  are  of  opinion,  that  by  these  arrange- 
ments the  parties  did  not  intend  to  create  a  partnership,  and 
that  their  true  relation  to  each  other  under  the  Agreement 
was  that  of  Creditor  and  Debtors.  The  iratsous  evidently 
wished  to  induce  the  Rajah  to  continue  his  advances,  and  for 
that  purpose  were  willing  to  give  him  the  largest  security 
they  could  offer;  but  a  partnership  was  not  contemplated, 
and  the  Agreement  is  really  founded  on  the  assumption,  not 
of  community  of  benefit,  but  of  opposition  of  interests. 

It  may  well  be,  that  where  there  is  an  agreement  to 
share  the  profits  of  a  trade,  and  no  more,  a  contract  of  part- 
nership may  be  inferred,  because  there  is  nothing  to  shew 
that  any  other  was  contemplated ;  but  that  is  not  the  present 
case,  where  another  and  different  contract  is  shewn  to  have 
been  intended,  viz.,  one  of  loan  and  security. 

Some  reliance  was  placed  on  the  Statute.  2S  &  29  Vict. 
c.  86,  sect.  I.  which  enacts,  that  the  advance  of  money  to  a 
firm  upon  a  contract  that  the  Lender  shall  receive  a  rate  of 
interest  varying  with  the  profits,  or  a  share  of  the  profits, 
shall  not,  of  itself,  constitute  the  lender  a  Partner,  or  render 
him  responsible  as  such.  It  was  argued,  that  this  raised 
an  implication  that  the  Lender  was  so  responsible  by  the  law 
existing  before  the  passing  of  the  Act.  The  enactment  is 
no  doubt  entitled  to  great  weight  as  evidence  of  the  law, 
but  it  is  by  no  means  conclusive ;  and  when  the  existing  law 
is  shewn  to  be  dift'erent  from  that  which  the  Legislature  sup- 
posed it  to  be,  the  implication  arising  from  the  Statute  can- 
not operate  as  a  negation  of  its  existence.  What  may  be 
the  effect  of  the  positive  enactment  contained  in  the  5th 
clause  of  the  Act,  so  far  as  regards  England,  it  is  not  neces- 
sary for  their  Lordships  to  consider.  The  Indian  Act,  No. 
XV.  of  1866,  passed  after  this  contract  was  made,  does  not 
contain  that  provision. 


MOLLWO,  MARCH  &  CO.  v.  THE  COURT  OF  WARDS    223 

It  was  strongly  insisted  for  the  Appellants  that  if  "a 
true  partnership,"  had  not  been  created  under  the  Agree- 
ment, the  Watsons  were  constituted  by  it  the  Agents  of  the 
Rajah  to  carry  on  the  business,  and  that  the  debt  of  the 
Plaintiffs  was  contracted  within  the  scope  of  their  age-iicv. 

Of  course,  if  there  was  no  partnership,  the  implied 
agency  which  flows  from  that  relation  cannot  arise  and  the 
relation  of  Principal  and  Agents  must  on  some  other  ground 
be  shewn  to  exist.  It  is  clear  that  this  relation  was  not  ex- 
pressly created,  and  was  not  intended  to  be  created  by  the 
Agreement,  and  that  if  it  exists  it  must  arise  by  implication. 
It  is  said  that  it  ought  to  be  implied  from  the  fact  of  the 
commission  on  profits,  and  the  powers  of  control  given  to  the 
Rajah.  But  this  is  again  an  attempt  to  create,  by  operation 
of  law,  a  relation  opposed  to  the  real  agreement  and  inten- 
tion of  the  parties,  exactly  in  the  same  manner  as  that  of 
Partners  was  sought  to  be  established,  and  on  the  same  facts 
and  presumptions.  Their  Lordships  have  already  stated  the 
reasons  which  have  led  them  to  the  conclusion  that  the  trade 
was  not  agreed  to  be  carried  on  for  the  common  benefit  of 
the  Watsons  and  the  Rajah  so  as  to  create  a  partnership ;  and 
they  think  there  is  no  sufficient  ground  for  holding  that  it 
Avas  carried  on  for  the  Rajah,  as  principal,  in  any  other  char- 
acter. He  was  not,  in  any  sense,  the  Owner  of  the  business, 
and  had  no  power  to  deal  with  it  as  Owner.  None  of  the  or- 
dinary attributes  of  Principal  belonged  to  him.  The  Watsons 
were  to  carry  on  the  business;  he  could  neither  direct  them 
to  make  contracts,  nor  to  deal  with  particular  Customers, 
nor  to  trade  in  the  manner  which  he  might  desire :  his  pow- 
ers were  confined  to  those  of  control  and  security,  and  sub- 
ject to  those  powers,  the  JJ^otsons  remained  Owners  of  the 
business  and  of  the  common  property  of  the  firm.  The 
Agreement  in  terms  and,  as  their  Lordships  think,  in  sub- 
stance, is-  founded  on  the  relation  of  Creditor  and  Debtors, 
and  establishes  no  other. 

Their  Lordships'  opinion  in  this  case  is  founded  on 
their  belief  that  the  contract  is  really  and  in  substance  what 


224  PARTNER'S  POWER  TO  BIND  COPARTNER 

it  professes  to  be,  viz.,  one  of  loan  and  security  between 
Debtors  and  their  Creditor.  If  cases  should  occur  where  any 
persons,  under  the  guise  of  such  an  arrangement,  are  really 
trading  as  Principals,  and  putting  forward,  as  ostensible 
Traders,  others  who  are  really  their  Agents,  they  must  not 
hope  by  such  devices  to  escape  liability ;  for  the  law,  in 
cases  of  this  kind,  will  look  at  the  body  and  substance  of 
the  arrangements,  and  fasten  responsibility  on  the  parties 
according  to  their  true  and  real  character. 

For  the  above  reasons  their  Lordships  think  that  the 
Judges  of  the  High  Court,  in  holding  that  the  Rajah  was  not 
liable  for  the  debts  of  the  Firm  of  IV.  N.  IVafson  &  Co., 
took  a  correct  view  of  the  case;  and  they  will,  therefore, 
humbly  advise  Her  Majesty  to  affirm  their  judgment,  and  to 
dismiss  this  appeal  with  costs. - 


^Compare:  Badeley  v.  Consolidated- Bank,  L.  R.,  38  Ch.  D.  238,  1888. 
(The  plaintiff  advanced  money  to  a  contractor  to  enable  him  to  carry 
out  a  contract  with  a  railway  company  for  the  construction  of  a  railway, 
and  the  parties  executed  a  deed  by  which  the  contractor  assigned  to  the 
plaintiff  all  his  machinery,  plant,  &c.,  and  all  shares  and  debentures  he 
might  receive  from  the  company  to  secure  the  repayment  of  the  loan. 
The  deed  contained  the  following  provisions:  (i)  that  the  plaintiff 
should  receive  10  per  cent,  interest  on  the  money  advanced  and  10  per 
cent,  of  the  net  profits  of  the  contract;  (2)  that  the  contractor  should 
apply  all  the  moneys  advanced  in  carrying  on  the  works;  (3)  that  if  the 
contractor  should  become  bankrupt  the  plaintiff  might  enter  and  com- 
plete the  works  ;  (4)  that  the  plaintiff  might  sell  the  property  in  case  of 
default,  but  that  he  should  not  sell  the  shares  or  debentures  within 
twelve  months  after  the  completion  of  the  contract;  (5)  that  in  calcu- 
lating the  net  profits  the  contractor  should  be  allowed  to  draw  out 
£1,000  a  year  for  his  services.  Letters  passed  between  the  plaintiff  and 
the  contractor  in  which  the  money  advanced  was  spoken  of  as  "capital" 
and  "working  capital,"  and  expressions  were  used  shewing  that  both 
parties  had  a  common  interest  in  the  works.  Held,  that  the  stipulations 
in  the  deed  and  expressions  in  the  correspondence  were  all  consistent 
with  the  object  of  securing  repayment  of  the  money  advanced,  and  were 
not  sufficient  evidence  to  show  a  partnership  between  the  parties.) 


EASTMAN  V.  CLARK  225 


EASTMAN  v.  CLARK. 
In  the  Supreme  Court  of  New  Hampshire,  1872, 

53  New  Hampshire,  276. 

Assumpsit,  by  Cyrus  Eastman  against  Curtis  C.  Clark, 
Damon  Y.  Clark,  and  Nicholas  T.  Stillings,  to  recover  a  bal- 
ance alleged  to  be  due  for  three  hundred  and  seventy-five 
bushels  of  corn  sold  by  the  plaintiff  to  the  defendants  in  the 
summer  of  1864.  The  two  first  defendants  were  defaulted, 
and  Stillings  pleaded  the  general  issue. 

At  the  trial,  it  appeared  that  in  the  summer  of  1864 
the  defendants  were  engaged  in  running  a  line  of  stages  be- 
tween the  Crawford  house  in  the  White  ^Mountain  Notch 
and  the  town  of  Jackson.  It  was  agreed  between  them  that 
the  two  Clarks  should  furnish  a  coach  and  two  six-horse 
teams  and  driver  and  other  appointments  for  the  use  of  this 
line,  and  that  Stillings  should  furnish  the  same  amount  of 
stock ;  and  the  parties  did  so  furnish  such  stock. 

There  was  conflict  in  the  evidence  as  to  the  way  the 
teams  and  other  material  were  to  be  supported,  the  plaintiff's 
testimony  tending  to  prove  that  the  teams  were  supported 
at  the  joint  expense  of  all  the  defendants,  and  that  the 
profits  of  the  entire  business  were  divided  by  the  parties,  one- 
half  to  the  Clarks  and  one-half  to  Stillings,  while  the  de- 
fendants' testimony  tended  to  prove  that  each  party  was  to 
support  and  maintain  his  stock  at  his  own  expense  and  not 
at  the  joint  expense  of  the  three  defendants,  and  that  it  was 
so  maintained,  and  that  the  gross  receipts  of  the  business 
were  to  be  divided  between  the  parties,  one-half  to  the 
Clarks,  and  one-half  to  Stillings,  and  that  they  were  so 
divided. 

The  court  instructed  the  jury  that  the  defendants  would 
be  partners  in  respect  to  third  persons,  whether  by  the  agree- 
ment the  profits  or  the  gross  receipts  were  so  divided,  and 


226  PARTNER'S  POWER  TO  BIND  COPARTNER 

would  be  jointly  liable  for  supplies  furnished  for  the  busi- 
ness, unless  the  plaintiffs  had  notice  that  there  was  to  be  no 
such  joint  liability.  To  these  instructions  the  defendants 
excepted.  The  jury  returned  a  verdict  for  the  plaintiff,  but, 
in  answer  to  a  question  put  to  them,  found  that  the  profits 
were  not  divided,  but  that  the  gross  receipts  were  divided. 
The  plaintiff's  evidence  also  tended  to  prove  that  Stillings 
expressly  authorized  Curtis  C.  Clark  to  purchase  this  corn 
on  joint  account  of  the  three  defendants,  and  that  he 
did  so  purchase  it,  but  the  jury,  in  answer  to  a  question 
put  by  the  court,  found  that  no  such  express  authority 
was  given  by  Stillings.  The  defendants  move  for  a  new 
trial  for  error  in  the  instructions  aforesaid,  and  in  case 
there  is  error  in  those  instructions,  as  to  the  effect  of  a 
division  of  the  gross  receipts,  the  verdict  is  to  be  set  aside, 
and  a  general  judgment  entered  for  the  defendant  Stillings. 
Some  time  after  the  jury  had  retired,  they  sent  to  the  pre- 
siding justice  this  question  :  "If  the  jury  find  that  the  Clarks 
and  Stillings  divide  the  gross  receipts,  does  that  bind  them 
jointly  to  the  third  party?" — to  which  this  answer  was  made 
in  writing,  with  directions  to  return  it  into  court  with  the 
other  papers:  "If  the  jury  find  that  the  Clarks  and  Stillings 
ran  the  staging  together  upon  the  agreement  to  divide  the 
gross  receipts  between  them,  they  are  liable  for  supplies  fur- 
nished for  that  business."  The  defendants'  counsel  except 
to  these  instructions,  because  of  omitting  the  qualifications 
that  the  defendants  would  be  liable  jointly  unless  the  plaintiff 
had  notice  that  there  was  to  be  no  such  joint  liability;  which 
qualification  had  been  before  distinctly  given.  If  there  is 
error  in  omitting  this  qualification,  the  verdict  is  to  be  set 
aside, — but  no  judgment  entered  for  Stillings.  unless  error 
is  found  in  the  instructions  as  to  gross  receipts.^ 

Doe,  J. :  When  Judge  Story  had  written  his  treatise  on 
agency,  he  began  his  commentaries  on  the  law  of  partnership 
thus  :  "Having  completed  our  review  of  the  law  of  agency,  we 


^  The  Reporter's  notes  of  the  opinion  of  Chief  Justice  Bellows,  who 
died  before  the  decision  was  reached,  is  omitted. 


EASTMAN  V.  CLARK  227 

are  naturally  conducted,  in  the  next  place,  to  the  consideration 
of  the  law  of  partnership ;  for  every  partner  is  an  agent  of 
the  partnership,  and  his  rights,  powers,  duties,  and  obliga- 
tions are,  in  many  respects,  governed  by  the  same  rules  and 
principles  as  those  of  an  agent.  A  partner,  indeed,  virtually 
embraces  the  character  both  of  a  principal  and  of  an  agent. 
So  far  as  he  acts  for  himself  and  his  own  interest  in  the 
common  concerns  of  the  partnership,  he  may  properly  be 
deemed  a  principal ;  and,  so  far  as  he  acts  for  his  partners, 
he  may  as  properly  be  deemed  an  agent."  Story  on  Part., 
sec.  I. 

"The  authorities  are  uniform  in  maintaining  the  doc- 
trine that,  where  the  principal  is  unknown  to  the  vendor  at 
the  time  of  a  sale,  he  may,  upon  discovering  the  principal, 
resort  to  him  for  payment,  although,  in  the  absence  of  such 
knowledge,  the  credit  may  have  been  given  to  the  agent 
alone,  and  his  individual  note  alone  have  been  taken  for  the 
debt.  Story  on  Agency  291  ;  Paterson  v.  Gandascqui,  15 
East,  62;  Raymond  v.  Crozi'ii  &  Eagle  Mills,  2  Met.  324; 
Thomson  v.  Davenport,  9  B.  &  C.  78.  The  same  principle, 
which  seems  to  have  been  uniformly  applied  to  the  case  of 
principal  and  agent,  is  equally  applicable  to  that  of  an 
individual  partner  and  his  firm.  Each  partner  is  an  author- 
ized agent  for  the  firm;  and  if  the  individual  partner  obtain 
money  or  goods  on  his  own  credit  for  the  use  of  the  firm, 
without  disclosing  the  interest  of  the  partnership  in  the  trans- 
action, the  debt  contracted  is  the  debt  of  the  firm,  notwith- 
standing the  note  of  the  individual  partner  alone  may  have 
been  given  and  taken  therefor."  Tucker  v.  Peaslee,  36  N.  H, 
167,  176;  Farr  v.  Ulieeler,  20  N.  H.  569,  575.  "As  the  de- 
fendants were  partners,  they  were  both  liable  to  the  plain- 
tiffs, notwithstanding  at  the  time  of  the  sale  the  plaintiffs 
supposed  that  they  were  giving  credit  to  Smith  only.  In 
purchasing  the  goods,  he  was  the  authorized  agent  of  the 
copartnership,  *  *  and  the  plaintiffs  *  *  may  well 
sustain  an  action  against  those  who  were  in  truth  the  pur- 
chasers."   Smith  v.  Smith,  27  X.  H.  244.  253. 


228         PARTNER'S  POWER  TO  BIND  COPARTNER 

When  A  authorizes  B  to  make  a  contract  in  his  behalf, 
the  contract  is,  in  a  certain  sense  and  for  some  purposes, 
the  contract  of  A.  In  contemplation  of  law  he  makes  it. 
Whether  he  makes  it  personally,  by  the  exercise  of  his  own 
mind,  hand,  or  voice,  or  instrumentally  by  the  mind,  hand, 
or  voice  of  his  agent  B,  is  immaterial  so  far  as  his  own 
liability  is  concerned.  He  is  as  much  the  principal  in  one 
case  as  in  the  other.  So  he  is  equally  a  principal  whether  he 
is  sole  principal  and  B  his  agent,  or  whether  B  is  a  joint 
principal  with  him  as  well  as  his  agent.  If  they  are  partners, 
B  makes  the  contract  as  a  principal,  and  also  as  agent  of  A. 
If  we  say  he  makes  it  as  an  agent  of  the  firm,  we  mean  that 
he  makes  it  as  agent  of  A,  and  also  as  agent  of  himself. 
And  as  the  contract  is  equally  A's  contract,  whether  B  is 
merely  his  agent,  or  his  agent  and  also  a  joint  principal  with 
him,  so  in  each  case  A  is  equally  bound,  wdiether  he  is  or  is 
not  known  to  the  other  contracting  party  to  be  a  principal. 
The  cases  in  which  A  is  not  liable  because  the  other  contract- 
ing party,  knowing  him  to  be  a  principal,  elects  not  to  con- 
tract with  him,  stand  upon  the  ground  of  the  election  thus 
made  by  the  other  party.  Without  reference  to  that  excep- 
tional class  of  cases,  and  with  sole  reference  to  the  general 
question  raised  in  this  case,  if  B  is  agent,  A  is  liable  because 
he  is  the  principal :  if  B  is  a  joint  principal  as  well  as  agent, 
A  is  liable  because  he  is  a  principal:  if  A  is  known  to  the 
other  contracting  party  to  be  a  principal,  he  is  liable  because 
he  is  a  principal :  if  he  is  not  thus  known,  he  is  liable  because 
he  is  a  principal. 

In  the  case  supposed  by  Brother  Smith,  where  A  em- 
ploys B  to  make  a  purchase  in  B's  name  for  him  (A),  upon 
a  secret  agreement  between  A  and  B  that  A  is  not  to  be 
responsible  to  the  seller  for  the  price,  a  difficulty  arises  from 
an  ambiguity  in  the  terms,  "A  employs  B  to  make  a  pur- 
chase in  B's  name  for  him  (A)."  If  this  means  that  A  is 
the  principal  and  B  his  agent,  A  is  liable  because  he  is  the 
principal.  Edmunds  v.  Bnshell,  L.  R.,  i.O.  B.  97.  If  it 
means  that  B,  as  principal,  is  to  buy  the  property  of  C,  and 


EASTMAN  V.  CLARK  229 

then  sell  it  to  A,  A  is  not  liable  to  C  because  he  is  not  the 
principal.  The  question  of  A's  liability  is  the  question 
whether,  in  the  contract  of  purchase  from  C,  A  is  in  fact  the 
principal  and  B  his  agent,  or  whether  B  is  the  principal,  w^ho, 
after  he  has  bought  the  property  of  C,  is  to  sell  it  to  A ; 
whether  the  title  passes  directly  from  C  to  A,  or  from  C 
to  B  and  from  B  to  A ;  whether  there  are  to  be  two  succes- 
sive purchases  of  the  same  property,  or  only  one;  whether 
(in  the  contract  of  purchase  from  C)  A  or  B  is  the  pur- 
chaser. This  depends  (so  far  as  A's  liability  is  concerned, 
and  aside  from  fraud  and  estoppel)  upon  the  understanding 
between  A  and  B.  If  they  understand  the  title  passes  directly 
from  C  to  A,  and  not  through  B  as  an  intermediate  pur- 
chaser, A  is  the  principal,  B  is  his  agent,  and  A,  as  the 
purchaser,  is  bound  to  pay  C  for  the  property  which  he  buys 
of  C.  A's  denial  of  the  fact  that  he  is  the  purchaser,  has  no 
more  efifect  than  his  denial  of  any  other  fact;  an  agreement 
between  him  and  B  to  deny  the  fact,  does  not  alter  the  fact ; 
A,  being  the  purchaser,  is  responsible  as  the  purchaser  for 
the  price;  he  is  liable  upon  the  fact,  and  is  not  discharged 
from  his  liability  by  an  understanding  between  him  and  his 
agent  that  the  fact  should  not  be  disclosed  or  should  be 
denied.  A  purchase  of  goods  is  a  sale;  and  a  sale  is  some- 
thing more  than  the  vendor's  parting  with  his  property.  It 
includes  payment  made,  promised,  or  in  some  way  provided 
for  by  the  other  party  to  the  contract.  The  buyer,  /,  c,  the 
principal  who  buys,  is  necessarily  a  payer,  unless  the  vendor 
agrees  he  shall  not  be.  If  the  agreement  between  A  and  B 
is  made  known  to  C  during  the  negotiation,  and  he  expressly 
or  impliedly  agrees  not  to  look  to  A  for  payment,  he  is 
bound  by  his  agreement ;  but  he  is  not  bound  by  a  secret 
agreement  between  A  the  purchaser  and  B  the  purchaser's 
agent,  that  A  is  not  to  pay  C  for  property  bought  by  A  of  C. 
When  C  discovers  that  A  is  the  buyer,  he  is  not  deprived  of 
all  the  benefit  of  that  fact  by  the  undisclosed  agreement  infer 
alios  that  A  is  not  to  pay  for  what  he  buys.  That  agreement 
does  not  make  the  agent  B  the  purchaser  in  fact,  nor  relieve 


230         PARTNER'S  POWER  TO  BIND  COPARTNER 

the  purchaser  A  from  his  part  of  the  contract  of  purchase 
made  with  C.  The  agent,  holding  himself  out  as  the  pur- 
chaser, is  estopped  to  deny,  as  against  the  vendor  C,  that 
he  is  the  purchaser.  But  the  secret  agreement  between  the 
real  purchaser  and  his  agent,  that  payment  is  to  be  made  by 
the  latter  and  not  by  the  former,  is  no  part  of  the  contract  of 
purchase :  it  is  merely  an  extraneous  executory  agreement 
infer  alios  to  which  the  vendor  is  not  a  party.  C  is  a  party 
in  the  contract  of  purchase;  and  if  A  is  the  purchaser,  he  is 
liable  to  C  because  he  is  the  purchaser.  The  fact  that  he 
is  the  purchaser  is  the  material  thing ;  the  non-disclosure  of 
that  fact,  so  far  as  his  liability  is  concerned,  is  immaterial; 
his  intention  not  to  pay  is  as  immaterial  as  it  would  be  if  he 
had  held  himself  out  as  purchaser,  and  had  omitted  to  dis- 
close the  fact  that  he  intended  not  to  pay. 

The  question  whether  A  is  a  principal  and  B  his  agent, 
that  is,  whether  A  authorizes  B  to  make  the  contract  in  his 
behalf,  is  often  a  difficult  question  of  fact.  And  if  B  is  a 
principal,  the  question  whether  A  is  a  principal  is  the  same, 
and  may  be  as  difficult,  as  it  would  be  if  B  were  not  a  prin- 
cipal. If  B  is  a  principal,  the  question  whether  A  is  a  prin- 
cipal is  called  a  question  of  partnership:  if  B  is  not  a  prin- 
cipal, the  question  whether  A  is  a  principal  is  called  a 
question  of  principal  and  agent,  or  agency.  The  legal  char- 
acter of  the  question  whether  A  is  a  principal,  is  not  altered 
by  the  circumstance  that  B  is  or  is  not  a  principal,  nor  by 
the  circumstance  that  it  is  called  in  one  case  a  question  of 
partnership,  and  in  the  other  a  question  of  agency.  And  as 
that  question  is  not  affected  by  the  name  given  it  by  the 
tribunal  called  upon  to  decide  it,  so  it  does  not  depend  upon 
the  name  given  it  by  A  or  B,  or  both  of  them.  Through  all 
forms  and  words,  all  arrangements  simple  or  complicated,  all 
pretences  true  or  false,  all  contrivances  honest  or  fraudulent, 
the  law  requires  the  tribunal  to  search  for  the  substance,  the 
meaning,  the  understanding,  and  the  fact;  and  this  duty  is 
the  same  whether  B  is  a  principal  or  whether  he  is  not. 

Not  only  is  A  liable  as  a  principal  when,  as  a  matter 


EASTMAN  V.  CLARK  231 

of  fact,  he  is  a  principal,  whether  B  is  or  is  not  a  joint 
principal  with  him,  and  whether  A  is  or  is  not  known  by  the 
other  party  to  be  a  principal, — he  may  also  be  liable  when, 
as  a  matter  of  fact,  he  is  not  a  principal.     The  common-law 
rule,  generally  called  the  doctrine  of  estoppel,  is  applicable, 
and  is  applied  to  the  liability  of  A  as  a  principal  in  a  contract 
made  by  B.     If  B  is  held  out  by  A,  or  by  his  direction  or 
consent,  as  his  agent,  A  is  liable  as  a  principal :  he  is  estopped 
to  deny  the  existence  of  the  state  of  things  which  he  directly 
or  indirectly  induces  another,  or  causes  another  to  be  in- 
duced, to  believe  in  and  act  upon.     Though  not  a  principal 
in  fact,  he  is  a  principal  in  contemplation  of  law,  because 
he  is  estopped  to  deny  that  he  is  a  principal.    Being  estopped 
in  law  to  deny  that  he  is  in  fact  a  principal,  is,  so  far  as 
liability  to  creditors  is  concerned,  practically  the  same  as 
being  a  principal  in  fact.     Causing  another  to  act  upon  the 
belief  that  he  is  a  principal,  and  that  B  is  authorized  to  make 
a  contract  in  his  behalf,  that  is,  is  his  agent  for  that  purpose, 
he  is  estopped  to  deny  the  existence  of  the  relation  of  prin- 
cipal and  agent  between  himself  and  B. — in  other  words,  is 
estopped   to   deny   B's   authority, — without    regard   to   the 
question  whether  B  is  or  is  not  a  joint  principal  or  copartner. 
The  estoppel  operates  in  the  same  manner  and  with  the  same 
result,  whether  B  is  an  agent  merely — Hatch  v.  Taylor,  lo 
N.  H.  538;  Tozi'le  V.  Leazntt,  23  N.  H.  360,  374 — or  an 
agent  and  also  a  joint  principal.     Smith  v.  Smith,  27  N.  H. 
244,  252.     If  A  holds  B  out,  or  authorizes  B  to  hold  himself 
out.  as  his  agent,  the  circumstance  that  B  is  or  is  not  a 
principal,  is  immaterial  in  the  application  of  the  doctrine  of 
estoppel  to  A. 

Here  are  two  general  elementary  doctrines  of  the 
ancient  common  law,  holding  A  liable  as  a  principal  on  a 
contract  made  by  B: — i.  The  doctrine  of  the  liability  of 
an  actual  principal,  disclosed  or  undisclosed ;  2.  The  doctrine 
of  estoppel,  which  under  certain  circumstances  makes  a  man 
a  principal  in  law  when  he  is  not  a  principal  in  fact.  The 
latter  doctrine,  applied  to  this  subject,  is  merely  one  of  the 


232         PARTNER'S  POWER  TO  BIND  COPARTNER 

methods  of  ascertaining  whether  A  is  a  principal.  Both  doc- 
trines constitute  the  single  doctrine  of  the  liability  of  a  prin- 
cipal. If  A  is  in  fact  a  principal,  he  is  liable  because  he  is  a 
principal :  if  by  the  process  of  estoppel  in  law  he  is  a  prin- 
cipal, he  is  liable  because  he  is  a  principal.  And  each  of 
these  doctrines  or  parts  of  a  single  doctrine  has  a  legal 
operation  and  effect  irrespective  of  the  question  whether  B 
is  or  is  not  a  joint  principal  or  copartner  with  A.  The  appli- 
cation of  these  doctrines  to  the  question  of  A's  liability  does 
not  render  it  necessary  to  determine  whether  the  question  is 
one  of  agency  or  partnership,  that  is,  whether  B  is  an  agent 
merely,  or  an  agent  and  also  a  principal,  because,  whether 
B  is  or  is  not  a  principal,  A  is  equally  and  for  a  single  reason 
liable  as  a  principal  disclosed  or  undisclosed,  and  is  equally 
and  for  a  single  reason  estopped  to  deny  that  he  is  a  prin- 
cipal. He  is  liable  because  he  is  a  principal,  or  because  he 
holds  himself  out  or  suffers  himself  to  be  held  out  as  such. 
He  is  none  the  less  nor  for  a  different  reason  liable  when,  B 
being  a  principal,  the  question  of  A's  liability  is  called  a 
question  of  partnership:  he  is  none  the  more  nor  for  a  dif- 
ferent reason  liable  when,  B  not  being  a  principal,  the 
question  of  A's  liability  is  called  a  question  of  agency:  and 
the  test  of  his  liability  is  not  more  ambiguous  nor  anywise 
different  when,  it  being  uncertain  whether  B  is  or  is  not  a 
principal,  it  is  consequently  uncertain  whether  the  question 
of  A's  liability  is  to  be  called  a  question  of  partnership  or 
a  question  of  agency.  If  it  is  never  settled  whether  B  is  a 
principal,  and  it  is  consequently  never  known  by  which  of 
its  possible  names  the  question  of  A's  liability  is  to  be  called, 
that  question  can  be  settled  notwithstanding  it  is  an  anony- 
mous one ;  and  it  must  be  settled  on  the  same  legal  grounds 
as  if  its  name  were  known.  So  far  as  the  general  legal  test 
of  A's  liability  is  concerned,  the  two  names  of  the  question 
are  synonymous.  These  legal  rudiments  every  one  expresses 
in  language  most  satisfactory  to  himself.  There  is  a  choice 
of  words.  For  instance,  when  B  is  a  principal,  and  the 
question  is  whether  A  is  liable  as  a  copartner  or  joint  prin- 


EASTMAN  V.  CLARK  233 

cipal  with  him,  some  may  use  the  word  "partner,"  and  others 
may  prefer  the  word  "principal:"  which  ever  term  is  em- 
ployed, the  same  thing  is  meant,  and  the  same  idea  is  accu- 
rately conveyed.  But  the  use  of  some  words  in  indefinite, 
ambiguous,  and  opposite  senses  has  involved  the  authorities 
in  some  apparent  uncertainty  and  confusion.  When  A  and 
B  are  not  partners  in  fact,  but  are  liable  to  certain  creditors 
as  partners  in  law  by  estoppel,  they  are  partners  as  to  those 
creditors,  though  not  partners  as  between  themselves :  but 
the  phrase  "partners  as  to  third  persons  though  not  partners 
inter  scse,  as  sometimes  used,  signifies  not  "partnership  by 
estoppel,"  but  something  too  vague  and  visionary  to  be  un- 
derstood or  discussed.  "Profit,"  "profits  as  profits,"  "profits 
as  such,"  "profits  not  as  profits  but  as  something  else,"  "a 
share  of  the  profits,"  "a  community  of  interest  in  the  pro- 
fits," "a  specific  interest  in  the  profits  as  a  principal  trader." 
"a  specific  interest  in  the  profits  with  the  right  to  an  ac- 
count," "a  specific  lien  upon  the  profits,"  "taking  part  of  tlie 
fund  on  which  creditors  rely  for  payment,"  "jointly  con- 
cerned," and  other  common  expressions  relating  to  partner- 
ship liability,  have,  in  the  absence  of  clear,  precise,  and  fixed 
definitions,  become  a  cause  of  perplexity.  We  need  not  dwell 
upon  the  many  significations  of  "profit,"  or  on  any  distinc- 
tion between  the  uses  of  the  word  in  political  economy  and 
in  law.  Story  on  Part.,  sec.  21,  ii.  i.  For  our  practical 
purpose,  a  single  illustration  will  suffice.  Suppose  B,  going 
into  the  retail  flour  trade  with  no  capital,  hires  A  as  clerk 
for  one-ninth  of  the  profit,  buys  1,000  bbls.  of  flour  of  C  at 
$10  a  bbl.,  sells  it  all  at  $11  a  bbl.  in  one  m.onth,  in  a  store 
hired  of  D  at  $100  a  month,  and  the  business  is  then  closed. 
A,  C,  and  D  having  received  nothing:,  and  B  having-  the 
$11,000,  $10,000  of  that  sum  is  to  be  paid  to  C  for  the  flour. 
The  remaining  $1,000  is  the  primary,  gross,  or  sale  profit. 
Deduct  from  that  gross  profit  the  $100  due  D  for  rent,  and 
we  have  $900,  the  profit  out  of  which  the  deferred  creditor 
A  is  to  be  paid  for  his  services  as  clerk.  Deduct  from  that 
deferred  creditor  fund  one-ninth  of  it  due  A,  and  we  have 


234  PARTNER'S  POWER  TO  BIND  COPARTNER 

$800,  the  final  or  net  profit  of  B  the  principal.  Until  they 
are  paid,  A,  C,  and  D  are  creditors.  C  and  D  stand  on  an 
equal  footing  as  ordinary  creditors :  the  fact  that,  in  book- 
keeping, the  debt  to  D  for  rent  may  be  recorded  in  the  ex- 
pense account  does  not  affect  its  existence  as  a  debt:  the 
debt  to  A  for  services  may  be  recorded  in  the  same  account. 
C  and  D  are  general,  absolute  creditors,  relying  for  payment 
on  everything  until  they  are  paid :  then,  ceasing  to  be  credi- 
tors, they  rely  for  payment  on  nothing.  A  is  a  deferred  and 
contingent  creditor,  entitled  to  nothing  until  C  and  D  are 
paid,  and  then  entitled  to  nothing  unless  some  of  the  gross 
profit  is  left.  C  and  D,  until  they  are  paid,  rely  for  payment 
on  the  whole  of  B's  property, — upon  the  $1,000  gross  profit, 
as  v^^ell  as  the  rest  of  the  proceeds  of  the  flour.  They  do  not 
rely  on  what  may  be  left  after  they  are  paid.  They  do  not 
rely  on  the  $900  (deferred  creditor  fund)  left  after  they 
are  paid,  nor  on  the  $800  (net  profit)  left  after  payment  of 
all  creditors,  general  and  deferred. 

If  C  is  first  paid,  he  takes  part  of  the  fund  on  which 
D  relies  for  payment :  if  D  is  first  paid,  he  takes  part  of  the 
fund  on  which  C  relies  for  payment :  but  the  one  first  paid 
does  not,  by  the  act  of  receiving  payment,  become  liable  to 
the  other  for  taking  part  of  the  fund  on  which  they  both 
rely.  That  is  not  the  fund  of  which  A  is  to  have  one-ninth ; 
and  he  is  not  liable  to  C  and  D  for  not  taking  a  share  of  the 
fund  on  which  they  rely.  The  fund  of  which  A  is  to  have 
one-ninth  is  the  $900  left  after  C  and  D  are  paid:  on  that 
fund  C  and  D  do  not  rely;  and  A  is  not  liable  to  them  for 
taking  a  part  of  the  fund  on  which  they  do  not  rely.  He 
is  a  creditor,  though  a  deferred  one;  and,  as  creditors,  C 
and  D  do  not  become  liable  to  each  other  or  to  A  by  properly 
receiving  payment  out  of  the  fund  on  which  they  properly 
rely  for  payment,  so  A  does  not  become  liable  to  them  by 
receiving  payment  out  of  the  fund  on  which  he  relies. 

But  if  A,  as  a  joint  principal  and  copartner,  and  not  as 
creditor,  is  entitled  to  one-ninth  of  the  profit,  it  is  net  profit 
that  is  meant;  and  if  he  is  entitled  to  a  part  of  the  net  profit, 


EASTMAN  V.  CLARK  235 

he  is  liable  to  C  and  D,  not  because  he  is  entitled  to  a  part 
of  the  fund  on  which  they  rely. — for  they  do  not  rely  on 
the  net  profit ;  he  is  liable  to  them  because  he  is  a  principal. 
If  he  is  a  principal,  "the  profit"  of  which  he  is  to  have  a  part 
means  the  balance  of  gross  profit  left  after  paying  all  credi- 
tors: if  he  is  a  creditor,  "the  profit"  means  the  balance  of 
gross  profit  left  after  paying  all  creditors  but  himself. 
Whether,  in  a  particular  case,  "the  profit"  carries  the  one 
meaning  or  the  other,  depends  on  the  question  whether  he 
is  a  principal  or  a  creditor,  which  is  the  first,  last,  and  only 
question  in  the  case.  We  cannot  know  in  what  sense  "the 
profit"  is  used  by  the  parties  until  we  discover  whether  A  is 
a  principal  or  a  creditor.  How  can  that  be  a  method  of 
answering  a  question,  which  is  a  deduction  from  the  an- 
swer, and  cannot  be  known  until  the  answer  is  obtained? 
If  A  is  a  creditor,  he  is  none  the  more  and 
none  the  less  a  creditor  by  reason  of  his  being 
entitled,  as  a  creditor,  to  one-ninth  of  "the  profit:"  if  he  is  a 
principal,  he  is  none  the  more  and  none  the  less  a  principal 
by  reason  of  his  being  entitled,  as  a  principal,  to  one-ninth  of 
"the  profit."  WHien  A  and  B  agree  that  A  shall  have  one- 
ninth  of  "the  profit,"  they  may  mean  that  he  is  to  have  it  in 
the  capacity  of,  and  by  virtue  of  his  being  a  creditor :  they 
may  mean  that  he  is  to  have  it  in  the  capacity  of,  and  by 
virtue  of  his  being,  a  principal.  The  question  is.  Which  do 
they  mean?  The  sharing-profit  test  merely  repeats  that 
question  without  answering  it.  As  A  may  be  entitled  to 
one-ninth  of  a  fund  called  "profit,"  either  in  the  capacity 
of  a  creditor  or  in  the  capacity  of  a  partner,  his  ambiguous 
right  is  not  a  test  of  the  capacity  in  which  he  holds  it.  Tak- 
ing part  of  "the  profit"  is  no  more  the  test  of  his  being  a 
partner  than  it  is  the  test  of  his  being  a  creditor. 

In  the  supposed  case,  where  A  is  a  creditor  and  not  a 
partner,  there  are  three  dififerent  profit  funds,  or  one  profit 
fund  of  three  different  amounts  and  with  three  dififerent 
names, — i,  $i,ooo  gross  profit,  out  of  which,  as  well  as  out 
of  the  other  $10,000,   proceeds  of  the  flour,   the  general 


236         PARTNER'S  POWER  TO  BIND  COPARTNER 

creditors  are  to  be  paid;  2,  $900  deferred  creditor  fund  left 
after  payment  of  the  general  creditors  C  and  D;  3,  $800  net 
profit,  left  after  payment  of  the  general  creditors  C  and  D, 
and  the  deferred  creditor  A.  An  agreement  of  A  and  B  that 
A  is  to  have  one-ninth  of  the  profit,  means  either  that  A 
is  to  be  a  deferred  creditor  entitled  to  one-ninth  of  the  gross 
profit  left  after  payment' of  the  general  creditors  as  com- 
pensation for  his  services,  or  that  he  is  to  be  a  joint  prin- 
cipal and  copartner  with  B.  entitled  to  one-ninth  of  the  net 
profit.  In  the  former  case,  "the  profit''  means  neither  the 
gross  profit  nor  the  net  profit,  but  the  $900,  of  which  the 
$800  left  after  payment  of  A  is  the  net  profit  of  the  business 
in  which  B  is  sole  principal :  in  the  latter  case,  "the  profit'' 
means  the  $900  net  profit  of  the  business  in  which  A  and  B 
are  joint  principals.  The  difference  is,  not  in  the  amount 
which  A  is  to  receive,  but  in  the  capacity  in  which  he  is  to 
receive  it.  In  the  one  case,  as  a  clerk  hired  by  B,  and  as  a 
creditor  of  B,  he  is  to  receive  from  B,  in  payment  of  his  de- 
ferred debt,  one-ninth  of  the  amount  of  B's  gross  profits  left 
after  payment  of  other  creditors :  his  right  is  a  chose  in 
action,  not  a  thing  actually  or  constructively  in  his  posses- 
sion :  the  title  of  the  ninth  is  in  B,  and  not  in  A,  until  he  is 
paid ; — in  the  other  case,  as  a  joint  principal,  before  he 
receives  his  share,  he  owns,  in  common  with  B,  the  net 
profit  left  after  payment  of  all  partnership  creditors  of  A 
and  B :  the  title  is  in  A  and  B :  A  owns  one-ninth,  and  B 
owns  eight-ninths.  In  the  one  case,  the  net  profit  is  $800 :  A 
is  a  creditor  of  B,  not  a  principal :  B  owes  him  $100  for 
wages  which  he  can  recover  in  assumpsit  at  common  law : — 
in  the  other,  the  net  profit  is  $900:  A  is  a  joint  principal  and 
not  a  creditor :  B  owes  him  no  wages :  their  net  profit  cannot 
be  ascertained  and  divided  in  a  common-law  action:  for 
the  debts  contracted  by  B,  within  the  scope  of  his  authority 
as  agent  in  earning  that  net  profit,  A  would  be  liable,  did 
r.ot  the  existence  of  net  profit  show  that  those  debts  have 
been  paid. 

If  A  is  clerk  and  creditor,  he  receives  $100,  not  as  his 


EASTMAN  V.  CLARK  237 

share  of  the  profit  of  a  business  in  which  he  is  a  joint  prin- 
cipal, but  as  compensation  for  his  services  in  a  business  in 
which  B  is  sole  principal :  he  receives  one-ninth  of  the  profit, 
not  as  profit,  but  as  payment  of  a  debt.  If  A  is  a  principal, 
he  owns  one-ninth  of  the  profit  as  profit,  and  does- not 
receive  it  as  payment  of  a  debt.  The  distinction  between 
taking  profit  as  profit,  'and  taking  it  not  as  profit  but  as 
payment  of  a  debt,  is  a  familiar  one,  firmly  established  by 
the  authorities,  but  not  always  explained  as  clearly  as  it 
might  be.  It  is  the  distinction  between  a  partner  and  a 
creditor  obscurely  expressed.  Taking  a  share  of  the  profit 
as  profit,  is  taking  it  as  his  profit — as  the  profit  of  his  flour 
business — as  the  profit  of  a  principal — taking  it  in  the 
capacity  of  a  principal  trader — an  owner  of  the  profit — a 
partner:  taking  a  part  of  the  profit  as  payment  of  a  debt,  is 
taking  it  in  the  capacity  of  a  hired  man  or  other  creditor. 
If  A  is  clerk  and  creditor,  we  mean  by  his  share  of  the  profit 
what  is  his  w^hen  it  is  paid  to  him  by  his  employer,  but,  until 
then,  is  his  in  a  figurative  sense  only.  If  he  is  clerk  and 
creditor,  what  is  called  his  share  of  the  profit  belongs,  as  a 
matter  of  absolute  legal  title,  exclusively  to  B  until  he  pays 
it  to  A,  and  then  belongs  exclusively  to  A :  it  does  not,  at 
any  time,  belong  to  A  and  B  in  common,  or  in  any  manner 
indicated  by  the  ordinary  signification  of  the  terms  "share 
of  a  partner."  But,  if  A  is  a  joint  principal,  ''his  share"  is 
"the  share  of  a  partner"  in  the  net  profit.  The  indiscriminate 
use  of  the  word  "share,"  signifying  the  amount  of  his  wages 
and  debt  if  he  is  a  clerk  and  creditor  of  B,  and  signifying 
his  ownership  of  a  part  of  the  profit  in  common  with  B,  if 
he  is  a  principal,  is  a  cause  of  confusion.  The  distinction 
between  the  two  significations  of  "share,"  is  the  distinction 
between  a  creditor  and  a  partner. 

"Jointly  concerned  in  a  transaction," — Brown  v.  Cook, 
3  N.  H.  64, — and  other  explanatory  terms  often  used  to 
describe  the  relation  of  copartners,  may  be  useful  for  that 
purpose.  In  this  case,  the  jury  might  be  properly  instructed 
that  all  the  defendants  were  liable  if  they  were  "jointly  con- 


238  PARTNER'S  POWER  TO  BIND  COPARTNER 

cerned"  in  the  contract  made  by  one  of  them  with  the  plain- 
tiffs. The  judge  need  not  confine  himself  to  the  word  "co- 
partners;" he  may  say  "joint  principals:"  all  the  defendants 
were  "joint  principals"  if  they  were  "jointly  concerned"  in 
the  contract  as  the  parties  to  it  on  one  side, — as  the  pur- 
chasers of  the  corn, — as  the  joint  owners  of  the  corn  to 
whom  the  title  passed  from  the  plaintiff's.  "Jointly  con- 
cerned," if  it  means  all  that,  means  "joint  principals:"  if  it 
means  anything  less  it  is  not  a  useful  definition,  but  some- 
thing that  needs  defining,  and  is  of  no  use  until  it  is  defined. 
And  the  same  is  true  of  "  a  community  of  interest"  in  profits 
or  other  property,  or  in  any  contract  or  business.  If  "joint 
concern"  and  "common  interest"  are  used  as  synonymous 
with  the  relation  of  "joint  principals,"  and  if  they  are  so 
understood,  it  is  immaterial  which  form  of  expression  is 
employed:  but  such  terms  used  (as  they  often  are)  in  a 
vague,  undefined,  and  undefinable  sense,  cannot  be  accepted 
as  a  test  of  anything.  \Miat  is  wanted  is,  not  a  new  legal 
language,  but  an  accurate  use  of  the  old  ;  not  a  novel  doctrine, 
but  a  clear  understanding  of  what  is  settled. 

If  A,  by  agreement  with  B,  is  to  have  "a  share  of  the 
profit,"  meaning  a  part  of  the  profit  left  after  the  payment 
of  all  debts,  he  is  necessarily  a  principal,  because  he  is  either 
a  principal  or  a  creditor ;  and  a  creditor  cannot  be  entitled, 
as  a  creditor,  to  a  part  of  what  is  left  after  he  is  paid. 
Whether  he  is  a  principal  or  a  creditor  depends  upon  the 
agreement  between  him  and  B.  If  they  agree  he  shall  have 
a  part  of  "the  profit,"  what  do  they  mean  by  "the  profit"? 
If  they  mean  the  profit  left  after  the  payment  of  all  credi- 
tors, they  mean  that  A  is  not  to  be  one  of  those  creditors ; 
and,  not  being  a  creditor,  he  must  be  a  principal.  But  how 
are  we  to  know  whether  they  mean  "the  profit"  in  that 
sense,  until  we  ascertain  whether,  in  their  meaning,  A  is 
to  be  one  of  those  creditors  whose  payment  is  the  prere- 
quisite and  test  of  "the  profit"  in  that  sense?  Put  this  in 
what  form  we  may,  it  is  all  a  reasoning  in  a  circle,  or  a 


EASTMAN  V.  CLARK  2^9 

begging  of  the  question,  or  a  substitution  of  one  of  two 
synonymous  questions  for  the  other. 

What  difference  whether  A  is  to  receive  one-ninth  as 
wages,  or  horse  hire,  or  store  rent,  or  interest  of  money 
loaned  ?  How  can  a  debt  due  him  for  one  thing  make  Itim 
a  creditor,  and  a  debt  due  him  for  another  thing  make  him 
a  partner?  AMiat  he  is  to  receive  as  compensation  for  his 
own  work  or  the  work  of  his  horse,  for  the  use  of  his  store 
or  the  use  of  his  money,  for  knowledge  and  skill  sold  to  B 
or  for  goods  sold  to  B, — what  he  is  to  receive  in  the  capacity 
of  a  creditor  he  is  not  to  receive  in  the  capacity  of  a  partner. 
All  this  is  merely  saying,  if  he  is  a  creditor,  he  is  a  creditor; 
if  he  is  a  partner,  he  is  a  partner.  The  question  all  the  time 
is,  whether  he  is  a  creditor  or  a  partner;  and  to  say  the 
question  is,  whether  he  is  to  receive  a  part  of  the  profit  in 
the  one  capacity  or  the  other,  is,  not  to  invent  a  test  for 
ascertaining  the  answer  of  the  c|uestion,  but  merely  to  state 
the  question  in  a  form  that  involves  it  in  some  obscurity.  Is 
he  a  creditor,  or  a  partner?  That  is  the  original  question. 
Amend  that  question  by  inserting  in  it  the  so-called  sharing- 
profit  test,  and  the  remodelled  question  is,  Is  he  to  receive 
a  part  of  the  profit  in  the  capacity  of  a  creditor,  or  in  the 
capacity  of  a  partner?  The  experiments  of  ninety-eight 
years  have  failed  to  show  that  the  verbal  alteration  is  an 
improvement,  or  that  it  has  any  other  effect  than  to  bewilder 
the  inquirer  who  starts  with  the  supposition  that  it  means 
something. 

In  the  supposed  case,  A  is  either  a  creditor  or  copartner 
of  B.  He  is  to  receive  a  part  of  what  they  call  "profit."  in 
the  capacity  either  of  creditor  or  partner.  The  combined 
authorities  establish  a  sharing-profit  test  in  this  sense :  if  A  is 
to  have  something  in  the  capacity  of  a  creditor,  he  is  a 
creditor;  if  he  is  to  have  it  in  the  capacity  of  a  partner,  he 
is  a  partner.  The  discussions  of  the  last  ninety-eight  vears 
began  with  that ;  and  they  have  ended  where  they  began. 
The  difiiculty  now  is,  not  to  ascertain  the  result,  but  to  dis- 
cover what  disputed  point  was  supposed  to  be  involved  in 


240         PARTNER'S  POWER  TO  BIND  COPARTNER 

the  debate, — a  difficulty  not  unfrequently  found  at  the  close 
of  protracted  controversies. 

"Sharing  profits,"  with  the  qualification  "as  a  principal 
and  not  as  a  creditor,"  is  useless  as  a  legal  test,  because  the 
qualification  is  a  mere  repetition  of  the  question  for  the 
solution  of  which  a  test  is  sought :  without  that  qualification 
it  is  useless  because  it  is  equivocal.  In  its  literal  and  un- 
qualified form,  as  shown  by  my  Brother  Smith^  it  is  not 
consistent  with,  and  cannot  be  founded  upon,  the  general 
rules  of  law.  If  in  that  form  it  could  be  and  were  a  test, 
it  would  exist  as  the  creation  of  arbitrary  and  absolute 
authority.  In  examining  the  authorities,  it  is  an  advantage 
to  begin  with  the  supposed  test  wholly  severed  and  detached 
from  dim  and  indeterminate  generalities,  and  placed  apart 
by  itself  in  contrast  with  the  primary  principles  upon  which 
the  law  of  partnership  liability  is  based.  If  we  find  an 
authority  urging  that  an  undisclosed  principal  or  secret 
partner  should  be  liable,  we  know  that  is  accomplished  with- 
out a  sharing-profit  test:  if  we  find  an  authority  working 
out  a  liability  by  estoppel,  we  know  a  sharing-profit  test  in 
that  matter  is  irrelevant.  If  we  find  authorities  apparently 
presenting  or  recognizing  a  sharing-profit  test,  the  first  ques- 
tion will  be.  In  what  sense  is  the  test  announced,  and  what 
is  the  meaning  and  effect  of  its  exceptions  and  qualifications? 
If,  upon  a  careful  scrutiny,  the  so-called  test  of  sharing- 
profits,  enveloped  in  and  consolidated  with  its  mass  of  ex- 
ceptions and  qualifications,  when  compared  with  the  elemen- 
tary doctrine  of  the  liability  of  a  principal  disclosed  or  un- 
disclosed, is  found  to  be  nothing  more  than  a  badly  executed 
copy  or  paraphrase  of  that  doctrine,  or  a  fac-siniile  in  dis- 
guise, the  question  in  this  case  will  be  reduced  to  one  of  those 
contentions  about  words,  which  is  not  a  legal  controversy. 

*        *        *        2 

In  the  supposed  case  of  flour  trade,  where  A  is  to  have 
one-ninth  of  the  profit,  if  it  is  net  profit  that  he  is  to  have  a 


^  Judge  Doe's  interesting  examination  of  the  English  and  American 
authorities  is  necessarily  omitted  because  of  its  great  length. 


EASTMAN  V.  CLARK  241 

share  of,  he  is  to  have  it,  not  as  a  creditor,  but  as  an  owner.; 
the  net  profit,  in  cash,  specifically  ascertained,  identified  and 
deposited  by  itself,  is  the  joint  property  of  A  and  B  before 
it  is  divided;  it  is  the  residue  of  the  proceeds  of  the  sales; 
all  those  proceeds,  as  well  as  that  residue,  were  the  joint 
property  of  A  and  B ;  the  flour  which  produced  those  pro- 
ceeds was  their  property;  it  was  bought  and  sold  by  them 
as  joint  principals ;  the  title  passed  from  C  to  A  and  B,  and 
not  to  B  only ;  B,  in  buying  it,  acted  as  agent  of  A  as  well  as 
for  himself;  by  the  contract  of  purchase,  made  by  B  as  a 
joint  principal  and  agent  of  A.  A  is  bound  as  a  principal. 
If  we  begin  with  net  profit,  as  the  result  and  test,  and  cite, 
in  support  of  it,  the  cases  usually  grouped  under  JVaugh  v. 
Carver,  net  profit  leads  us  back  to  the  relation  of  principal 
and  agent  (the  doctrine  of  Cox  v.  Hickman)  as  the  starting- 
point.  If  we  begin  with  the  relation  of  principal  and  agent, 
it  leads  us  forward,  over  the  same  course,  to  net  profit  as  the 
result.     For  legal  and  practical  purposes,  it  is  one  route. 

In  Cox  v.  Hickman  (and  in  other  cases)  there  was  a 
difference  of  opinion  as  to  the  construction  of  an  assignment 
of  property  to  trustees  for  the  benefit  of  creditors,  which 
provided  for  the  continuance  of  the  debtor's  business,  and 
the  appropriation  of  the  profits  to  the  payment  of  creditors. 
The  question,  Who  were  the  principals  in  the  continued 
business?  was  rendered  difficult  by  the  complicated  nature 
of  the  assignment.  Whether  the  final  decision  of  that  ques- 
tion of  construction  was  right  or  wrong,  is  not  material 
in  the  present  case.  The  same  question  would  have  arisen 
under  the  sharing-profits  test.  By  the  true  construction  of 
the  assignment,  were  the  profits  to  be  received  by  the  credi- 
tors as  creditors,  or  as  joint  principals  and  partners  in  the 
continued  business?  The  insertion  of  the  word  "profits" 
in  the  question  does  not  cause  the  difficulty  of  the  question 
to  vanish. 

Lord  Cranworth  said  a  right  to  participate  in  profits, 
"no  doubt,  is  in  general  a  sufficiently  accurate  test;  for,  a 
right  to  participate  in  profits  affords  cogent,  often  conclusive, 


242         PARTNER'S  POWER  TO  BIND  COPARTNER 

evidence  that  the  trade  in  which  tlie  profits  have  been  made 
was  carried  on  in  part  for,  or  on  behalf  of,  the  person  setting- 
up  such  a  claim."  Cox  v.  Hickman,  9  C.  B.  (N.  S. )  92.  By 
a  "sufficiently  accurate  test,"  he  meant  satisfactory  evidence. 
His  remark  suggests  how  easily  a  piece  of  evidence  could  be 
transformed  into  a  legal  test  sub  niodo,  by  tribunals  accus- 
tomed, as  English  courts  are,  to  declare  their  judgment  on 
questions  of  fact.  When  Lord  Cranworth  said  sharing- 
profits  affords  cogent  evidence  of  a  partnership,  he  expressed 
his  opinion  on  a  question  of  fact ;  and  the  evident  soundness 
of  such  an  opinion  tends  to  obliterate  the  distinction  between 
the  law  and  the  fact  of  the  subject.  Sharing-profits,  in  the 
absence  of  all  other  evidence,  would,  as  a  matter  of  fact,  be 
cogent  evidence  of  a  partnership;  but  every  item  of  cogent 
evidence  is  not  a  legal  test :  moreover,  it  is  generally  impos- 
sible to  have  no  other  evidence  in  a  case  than  sharing-profits  : 
whether  it  is  cogent  or  weak,  depends  upon  its  character 
explained  by  other  circumstances:  in  this  jurisdiction,  the 
judge  does  not  give  the  jur}^  his  opinion  of  the  strength  of 
the  evidence. 

"A  partnership  in  which  the  entire  profit  was  to  belong 
to  some  of  them  in  exclusion  of  others,  would  be  manifestly 
unjust;  and,  as  between  the  parties  themselves,  it  would  not 
be  a  proper  partnership.  It  would  be  wdiat  the  Roman  law- 
yers called  societas  Iconina,  in  allusion  to  the  fable  of  the 
lion,  who,  having  entered  into  a  partnership  with  the  other 
animals  of  the  forest,  in  hunting,  appropriated  to  himself 
all  the  prey."  3  Kent  Com.  29;  Story  on  Part.,  sec.  18. 
This  is  civil  law  doctrine :  it  relates  wdiolly  to  the  force, 
effect,  and  validity  of  partnership  inter  scsc,  and  has  no 
reference  to  the  rights  of  third  persons.  If  it  were  a  doc- 
trine of  the  common  law,  it  w^ould  go  to  show  that  the  con- 
tract of  a  societas  Iconina  is  void  inter  sese,  and  not  that 
the  parties  are  liable  to  third  persons.  But  it  is  not  to  be  ad- 
mitted, without  deliberation,  that  there  is  any  such  doctruie 
in  the  common  law.  "It  may  be  said,"  says  ]\Ir.  Baron 
Bramwell,  mBuIlen  v.  Sharp,  L.  R.  i  C.  P.  126,  127,  "that 


EASTMAN  V.  CLARK  243 

if  this  reasoning  is  right,  a  man  might  bargain  to  receive  all 
the  profits  of  a  business,  and  not  be  liable.  The  answer  is, 
the  thing  is  impossible.  There  never  was,  and  never  will  be, 
a  bona  fide  agreement  by  one  man  to  carry  on  a  business, 
bear  all  its  losses,  and  pay  over  all  its  -profits.  Should  such 
an  agreement  appear,  it  would  obviously  be  colourable." 
Suppose  a  New  Hampshire  merchant,  having  gained  a  sufH- 
cient  estate  in  trade,  and  desiring  to  continue  his  business 
for  the  industrial  and  charitable  purpose  of  supporting  a 
missionary  in  Ceylon,  gives  him  a  bond  to  pay  him  all  the 
future  profits  of  his  business;  and  suppose  the  profits  are 
called  "net  profits"  in  the  bond :  was  there  ever  a  court  that 
would  hold  the  missionary  liable  as  a  partner  for  the  goods 
bought  by  the  merchant  in  carrying  on  his  business?  It 
would  be  evident  that  they  both  understood  the  missionary 
to  be  a  creditor  and  not  a  partner;  that,  by  "net  profits," 
they  meant  the  surplus  of  gross  profits  left  after  paying  all 
other  creditors  of  the  business ;  and  that,  in  the  literal  sense, 
there  would  be  no  net  profits  of  the  business.  Why  should 
the  missionary  be  liable,  especially  seeing  he  was  not  to 
defraud  the  other  creditors,  but  only  to  receive  the  balance 
of  profits  left  after  they  were  all  paid? 

The  result  of  this  examination  of  the  authorities  is,  that 
the  instructions  given  to  the  jury,  in  the  present  case,  were 
erroneous.  There  is  a  provision  in  the  reserved  case,  that, 
if  there  is  error  in  the  instructions  as  to  the  effect  of  a  divi- 
sion of  the  gross  receipts,  judgment  is  to  be  rendered  for 
Stillings.  But  the  mistrial  seems  to  have  been  such  that  the 
verdict  ought  to  be  set  aside,  and  a  new  trial  granted. 

Sargent,  C.  J. ;  Foster,  Ladd  and  Smith, ^  JJ.,  con- 
curring, a  new  trial  was  granted. 


'  The  opinion  of  Judge  Smith  is  omitted. 


244  PARTNER'S  POWER  TO  BIND  COPARTNER 


POOLEY  v.  DRIVER. 

In   the  Chancery   Division   of  the  High   Court  of 
Justice,  Before  Sir  George  Jessel,  M.  R.,  1876. 

Lazi'  Reports,  5  Chancery  Division,  458. 

The  case  involved  several  complicated  questions  of  fact, 
but  as  these  would  be  immaterial  if  the  Court  decided  in 
favour  of  the  Plaintiff  on  the  question  of  law  raised  by  the 
deeds,  his  Lordship  directed  that,  by  analogy  to  Rules  of 
Court,  1875,  Order  xxxiv.,  rule  2,  the  question  of  law  should 
be  first  disposed  of.^ 

Jessel,  M.  R.  : 

The  real  question  I  have  to  decide  in  this  case  is, 
whether  certain  contracts,  which  are  admitted  to  have  been 
entered  into,  made  the  Defendants  partners  in  the  firm  of 
Charles  Borrctt  &  Co.  If  they  did,  then  the  Plaintiff,  the 
holder  of  certain  bills  of  exchange  drawn  or  indorsed  by 
that  firm — whether  he  gave  value  for  them  or  not  is  ad- 
mittedly immaterial — is  entitled  to  the  relief  which  he  asks : 
if  not,  the  action  must  be  dismissed. 

Now,  first  of  all,  I  must  decide  the  question  as  to  what 
sort  of  evidence  I  must  rely  upon  to  prove  the  partnership. 
I  am  not  going  to  define  a  partnership.  The  attempt  has 
been  made  by  very  many  people,  and  some  of  the  attempts 
are  collected  together  in  the  well-known  book  by  Mr. 
Lindlcy,  now  Mr.  ]visi\ce. Lindley.  At  pages  2  and  3  of  the 
3rd  Edition  he  gives  fifteen  definitions  of  partnership  by 
different  learned  lawyers :  I  think  no  two  of  them  exactly 
agree,  but  there  is  considerable  agreement  amongst  them; 
and  I  suppose  anybody  reading  the  fifteen  may  get  a  general 
notion  of  what  partnership  means.    But  I  am  not  left  to  de- 


'  The  Reporter's  statement  of  the  facts  of  the  case  and  his  notes  of 
the  argument  of  counsel  are  omitted. 


POOLEY  V.  DRIVER  245 

cide  this  case  on  any  notions  of  my  own  of  what  is  a  partner- 
ship. Whatever  may  amount  to  a  partnership  is  a  subject 
which  has  been  settled  by  decision  according  to  EngHsh  law, 
and  the  incidents  of  the  partnership  simply  follow  from  the 
establishment  of  the  fact  of  the  partnership.  If  the  partner- 
ship is  established  as  a  fact,  then  the  liability  to  creditors  is 
a  mere  incident  flowing  from  the  establishment  of  the  fact. 
But  it  is  a  contract  of  some  kind  undoubtedly — a  contract, 
like  all  contracts,  involving  the  mutual  consent  of  the  par- 
ties:  and  it  is  undoubtedly  a  contract  for  the  purpose  of 
carrying  on  a  commercial  business — that  is,  a  business 
bringing  profit,  and  dividing  the  profit  in  some  shape  or  other 
between  the  partners.  That  certainly  partnership  is.  Whether 
it  is  anything  more  or  not  has  been  a  question  between 
various  authorities,  but  it  is  that  certainly. 

The  Civil  Code  of  Ne^cv  York,  which  contains  the  first 
definition  quoted,  gives  this  as  a  definition :  "Partnership  is 
the  association  of  two  or  more  persons  for  the  purpose  of 
carrying  on  business  together  and  dividing  its  profits  be- 
tween them."  It  undoubtedly  is  that,  ^^'hether  it  is  that 
and  something  more  is  a  question  of  consideration,  some 
writers  adding  qualifications  which  are  not  to  be  found  in 
that  definition,  and  others  excepting  out  of  it  even  the  com- 
munity of  profit ;  but  it  is  at  least  that.  There  could  not  be 
a  partnership  without  there  was  a  commercial  business  to  be 
carried  on  with  a  view  to  profit  and  for  division  of  profits; 
and  as  a  general  rule.  I  take  it.  if  it  fulfils  that  definition, 
it  is  a  partnership.  I  say.  as  a  general  rule,  that  simple 
definition  appears,  so  far  as  it  goes,  to  be  an  accurate  defini- 
tion. 

Then  whether  or  not  the  association  requires  that  one 
or  more  of  the  partners  shall  contribute  labour  or  skill,  or 
what  they  shall  contribute,  is  a  question  which  may  be  con- 
sidered as  subsidiary;  but  I  take  it  that  the  ordinary  mean- 
ing of  the  word  "partnership"  is  that,  no  doubt  as  a  rule, 
each  partner  does  contribute  something,  either  in  the  shape 
of  property  or  skill.     But  it  is  not  a  universal  rule,  and 


246  PARTNER'S  POWER  TO  BIND  COPARTNER 

therefore  the  definition  of  Chancellor  Kent,  which  is  given 
in  the  same  page,  is  not  quite  correct.  He  says :  "Partner- 
ship is  a  contract  of  two  or  more  competent  persons  to  place 
their  mone}',  effects,  labour,  and  skill,  or  some  or  all  of 
them,  in  lawful  commerce,  or  business  .   .   ." 

You  can  have,  undoubtedly,  according  to  English  law, 
a  dormant  partner  who  puts  nothing  in — neither  capital,  nor 
skill,  nor  anything  else.  In  fact,  those  who  are  familiar  with 
partnerships  know  it  is  by  no  means  uncommon  to  give  a 
share  to  the  widow  or  relative  of  some  former  partner  who 
contributes  nothing  at  all,  neither  name,  nor  skill,  nor  any- 
thing else.  Therefore  it  is  not  quite  accurate,  as  Chancellor 
Kent  puts  it,  that  they  must  contribute  labour,  skill,  or 
money,  or  some  or  all  of  them. 

Then  Pothier  has  a  definition  in  which  he  says  it  is  "a 
contract  by  which  two  or  more  people  put,  or  contract  to  put, 
in  common  something  to  make  in  common  an  honest  profit, 
which  they  pledge  themselves  to  render  an  account  of  to 
one  another."  Pothier  has  the  words  "an  honest  profit  (tm 
profit  honneter)."  The  Nezv  York  definition,  oddly  enough, 
says  "carrying  on  business ;"  of  course  the  business  might 
be  that  of  highwayman,  and  that  could  hardly  have  been 
meant  by  the  framers  of  the  Nczu  York  Code,  and  I  must 
assume  that  they  meant  some  honest  calling,  which  is  sup- 
plied by  Pothier's  definition.  It  shews  that  even  in  the  most 
accurate  definitions  inserted  in  a  Code  something  must  be 
supplied  which  is  not  expressed. 

Then  Pothier  says  they  must  have  "something  in  com- 
mon {en  couimim  quelque  chose),''  but,  as  I  said  before, 
that  is  not  necessary  according  to  the  English  notion  of  part- 
nership. The  dormant  partner  may  put  in  nothing  what- 
ever, as  in  the  case  of  the  widow  or  child  of  a  deceased 
partner;  therefore  that  shews  again  the  enormous  difficulty 
of  giving  a  definition  which  shall  be  applicable  to  all  cases. 
As  I  have  already  said,  the  Nezv  York  definition,  with  the 
words  I  have  put  into  it,  will  certainly  be  sufficient  for  this 
purpose,  without  considering  whether  it  is  accurate  in  ever}^ 


POOLEY  V.  DRIVER  247 

respect;  and  I  may  again  say  that,  although  one  of  the  defi- 
nitions speaks  of  a  community  of  loss,  as  a  rule  they  do  not. 

This  association  which  I  have  to  consider  certainly 
comes  within  about  twelve  out  of  the  fifteen  definitions, 
therefore  prima  facie  this  is  a  partnership  according  to  those 
definitions. 

But  that  is  not  alone  enough :  there  is  authority  which 
tells  me  how  to  find  out  whether  a  certain  contract  is  a  part- 
nership or  not.  If  we  find  an  association  of  two  or  more 
persons  formed  for  the  purpose  of  carrying  on  in  the  first 
instance,  or  of  continuing  to  carry  on  business,  and  we  find 
that  those  persons  share  between  them  generally  the  profits 
of  that  business,  as  I  understand  the  law  of  the  case  as  laid 
down  by  the  highest  authority,  those  persons  are  to  be  treated 
as  partners  in  that  business  unless  there  are  surrounding 
circumstances  to  shew  that  they  are  not  really  partners. 

That,  of  course,  brings  me  again  to  another  question, 
which  must  always  be  considered,  and  that  is,  whether,  look- 
ing at  the  contract  as  a  whole,  it  is  intended  to  secure  the 
benefit  of  a  partnership  with  or  without  its  liabilities ;  or 
whether  it  is  not  intended  that  the  benefits  of  a  partnership 
shall  be  secured.     *     *     *2 

It  is  hardly  necessary  to  refer  to  any  of  the  other 
authorities  on  the  point,  because  those  two  authorities  settle 
the  law,  and,  as  far  as  I  am  concerned,  put  an  end  to  all 
discussion. 

There  is,  however,  a  passage  in  the  case  of  Kilshaw 
V.  Jtikcs  [3  B.  &  S.  847]  which  I  think  is  worth  referring  to. 
It  is  in  the  judgment  of  Mr.  Justice  Blackburn,  w^ho  says 
[Ibid.  865]  :  "It  is  true  that  the  supposed  case  is  one  in 
the  usual  course  of  trade,  whilst  such  a  transaction  as  the 
present  is  rather  out  of  the  ordinary  course  of  business;  and 
that  there  always  is  a  possibility  that  a  person  who  is  really 
a  partner  may  endeavour  to  cloak  his  interest  by  an  apparent 
arrangement  of  this  sort.     These  were  fair  topics  for  the 

'His  discussion  of  the  cases  of  Cox  v.  Hickman  and  MoUzvo,  March 
&  Co.  V.  The  Court  of  JVards,  supra,  is  omitted. 


248  PARTNER'S  POWER  TO  BIND  COPARTNER 

consideration  of  the  jury,  and  were  no  doubt  urged  upon 
them  by  the  counsel  for  the  Plaintiff."  So  that  Mr.  Justice 
Blackburn  treats  it  as  a  question  of  evidence,  from  which  the 
jury  were  entitled  to  draw  their  conclusion  as  to  what  was 
really  intended;  and  that  they  having  found  against  the 
partnership,  he  was  not  bound  to  disturb  that  conclusion. 
Then  [3  B.  &  S.  868]  the  learned  Judge  says  this,  quoting 
Lord  Cramvorth :  "  'The  debtor  is  still  the  person  solely  in- 
terested in  the  profits  .  .  .  He  receives  the  benefit  of  the 
profits  as  they  accrue,  though  he  has  precluded  himself  from 
applying  them  to  any  other  purpose  than  the  discharge  of 
his  debts.  The  trade  is  not  carried  on  by  or  on  account  of 
the  creditors.'  Taking  this  to  be  the  law,  and  it  was  so 
necessary  for  the  decision  in  Cox  v.  Hickman  [8  H.  L.  C. 
268]  that  I  think  it  must  be  considered  as  the  decision  of  the 
House  of  Lords,  it  certainly  seems  to  me  to  follow  that  the 
arrangement  which  the  jury  have  found  to  have  really  ex- 
isted between  Jukes  and  Till  and  JVynn  did  not  make  Jukes 
liable  to  the  Plaintiff  on  the  contract  which  the  other  two 
made  for  the  purchase  of  the  timber.  It  is  not  necessary  in 
this  case  to  consider  how  far  the  older  cases  are  overruled 
by  the  decision  in  Cox  v.  Hickman,  for  it  seems  to  go  far 
enough,  at  least,  to  decide  this  case." 

There  is  only  one  more  passage  which  I  wish  to  read 
from  the  authorities,  and  that  is  from  the  case  of  Re  English 
and  Irish  Church  and  University  Assurance  Society  [i  H.  & 
M.  85,  106],  a  decision  by  Vice-Chancellor  JVood:  "If  you 
employ  A.  B.  to  enter  into  a  contract  on  your  behalf,  you 
become  liable  in  respect  of  that  contract,  he  being  your  agent ; 
and  it  may  well  be,  that,  in  the  absence  of  any  stipulation  to 
the  contrary,  you  make  him  your  agent  by  taking  part  of  the 
profits  of  the  adventure ;  and  it  is  on  that  footing  that  par- 
ticipation in  profits  comes  to  be  regarded  as  a  test  of  partner 
or  no  partner ;  but  the  real  test  is,  whether  the  parties  who 
carry  on  the  business  are  constituted  your  agents  in  con- 
tracting liabilities  in  respect  of  it."  Therefore  the  Vice- 
Chancellor  entirely  agrees  that  participation  in  profits  is  a 


POOLEY  V.  DRIVER  249 

proper  test  and  a  sufficient  test,  if  there  is  nothing  to  over- 
ride it. 

I  may  cite  further  from  page  45  of  the  third  edition  of 
Air.  Lindleys  book,  considering  that  learned  gentleman  is 
now  a  Judge,  the  conclusion  that  he  comes  to  as  to  the  effect 
of  the  case  of  Cox  v.  Hickman  [8  H.  L.  C.  268] — "that 
prima  facie  the  relation  of  principal  and  agent  is  constituted 
by  an  agreement  entitling  one  person  to  share  the  profits 
made  by  another  to  an  indefinite  extent;  but  that  this  in- 
ference is  displaced  if  it  appears  from  the  whole  agreement 
that  no  partnership  or  agency  was  really  intended." 

I  think,  therefore,  the  law  is  so  far  settled  that  I  ought 
to  have  no  great  difficulty  in  applying  it  to  the  case  before 
me.  Before  going  into  the  deeds  at  length,  I  will  consider 
the  effect  of  them. 

In  October,  1868,  Borrctt  and  Hagen  agree  to  become 
partners  in  carrying  on  the  business  together  of  grease. 
pitch,  and  manure  manufacturers.  Borrctt  had  carried  it 
on  before  alone,  but  he  and  Hagen  now  made  an  arrange- 
ment of  partnership.  The  arrangement  in  substance  was 
this  :  that  they  should  contribute  certain  shares  of  the  capital, 
and  should  give  their  services  in  order  to  carry  on  the 
business;  that  the  rest  of  the  capital  should  be  contributed 
by  other  persons  who  were  disposed  to  come  forward  under 
the  provisions  of  the  Act  to  which  I  shall  call  attention 
presently — the  Act  which  is  commonly  called  Lord  Chief 
Justice  BoviU's  Act — and  then  that  the  capital  should  be 
divided  in  certain  proportions,  giving  everybody  who  put  in 
£500,  amongst  those  other  contributors,  a  share  in  the  capital 
in  proportion,  and  a  share  in  the  profits  indefinitely.  When 
the  partnership  is  wound  up  this  capital  is  to  be  paid  back 
preferentially.  The  contributors  were  to  take  their  share  of 
the  profits,  but  if  it  turned  out  that,  on  taking  a  final  account, 
the  profits  of  any  years  which  had  been  paid,  being  added 
together,  exceeded  the  total  profits  made  from  the  business, 
the  contributors  were  to  pay  back  the  excess,  not  exceeding 
in  any  event  the  amount  they  had  contributed,  and  of  course 


250  PARTNER'S  POWER  TO  BIND  COPARTNER 

not  exceeding  in  any  event  the  amount  they  had  received  in 
profits. 

That  is  the  substance  of  the  deeds;  but  besides  that, 
there  were  a  great  many  of  the  provisions  usually  inserted 
in  partnership  deeds,  and  every  one  of  those  provisions  was 
extended  to  the  contributors;  that  is  to  say,  if  they  had  been 
ordinary  dormant  partners,  those  provisions  would  have  been 
inserted  in  their  favour,  and  would  have  given  them  every 
right  which,  as  far  as  I  can  understand,  an  ordinary  dormant 
partner  would  have.  I  put  it  to  the  learned  counsel,  in  the 
course  of  the  argument,  whether  they  could  suggest  any 
right  which  would  be  given  to  an  ordinary  dormant  partner, 
not  possessed  by  these  contributors,  and  after  consideration 
and  discussion  they  were  unable  to  do  so.  That  is  the  gen- 
eral effect  of  the  deeds. 

That,  then,  is  the  position  of  the  parties.  The  partner- 
ship was  for  the  term  of  fourteen  years;  the  loan  also  was 
for  the  same  term.  If  the  partnership  comes  to  an  end 
sooner,  the  loan  must  come  to  an  end  sooner;  so  that,  in 
fact,  if  you  were  to  describe  the  contributors  as  dormant 
partners  in  the  concern,  liable  to  a  limited  extent  to  loss,  and 
with  a  guarantee  of  their  capital  from  the  active  partners, 
you  would  exactly  describe  their  position;  and  I  do  not 
know  of  any  other  shorter  mode  of  describing  the  position 
of  these  contributors. 

Well,  if  that  is  so,  is  not  that  exactly  the  thing  which 
it  was  intended  should  not  take  place — that  a  man  should 
not  put  forward  another  to  carry  on  the  business  ostensibly 
and  himself  take  the  profits?  It  is  the  very  object  and 
meaning  of  the  transaction,  as  I  understand  it,  to  give  these 
contril)utors  that  very  position  which  dormant  partners 
usually  occupy,  wnth  certain  collateral  advantages — excep- 
tional, perhaps,  but  not  altogether  unusual ;  unusual,  no 
doubt,  in  the  sense  that  I  have  seldom  seen — I  was  going  to 
sav  so  barefaced,  but  when  you  come  to  see  the  reason  of  it, 
I  will  say  so  palpable — an  intention  exhibited  on  the  face  of 
the  documents  to  give  the  contributors  all  the  benefits  of 


POOLEY  v.  DRIVER  251 

the  partnership,  and  if  possible  to  secure  them  from  suffering 
from  the  habihties.  The  reason  of  it  was  this :  The  f ramers 
of  the  instrument  thought  that  BoviU's  Act  would  protect 
them,  and  that  comes  again  to  a  question  of  law,  as  to 
whether  the  Defendants  who  executed  the  deeds  are,  in  a 
better  position  than  the  Defendants  who  did  not. 

First  of  all,  as  to  the  Defendants  who  did  not.  I 
decided  yesterday,  and  I  merely  repeat  it,  that  Messrs. 
Drk'cr,  not  being  parties  to  any  instrument  in  writing  signed 
by  them,  were  not  parties  to  a  "contract  in  writing"  within 
BoviU's  Act,  and  therefore  could  not  have  the  benefit  or 
protection  afforded  by  that  Act.  But,  with  regard  to  the 
Defendants  who  did  execute  the  deeds,  of  course  they  would 
be  entitled  to  the  benefit  of  the  Act,  and  then  the  mere 
question  I  have  to  try  is  whether  they  have  rightly  construed 
the  Act. 

It  was  said,  and  said  with  considerable  force,  by  Mr. 
Chitty  and  Mr.  Mathciv,  that  they  never  intended  to  be 
partners.  What  they  did  not  intend  to  do  was  to  incur  the 
liabilities  of  partners.  If  intending  to  be  a  partner  is  intend- 
ing to  take  the  profits,  then  they  did  intend  to  be  partners. 
If  intending  to  take  the  profits  and  have  the  business  carried 
on  for  their  benefit  was  intending  to  be  partners,  they  did 
intend  to  be  partners.  If  intending  to  see  that  the  money  was 
applied  for  that  purpose,  and  for  no  other,  and  to  exercise 
an  efficient  control  over  it,  so  that  they  might  have  brought 
an  action  to  restrain  it  from  being  otherwise  applied,  and 
so  forth,  was  intending  to  be  partners,  then  they  did  intend 
to  be  partners.  But  if  it  is  tried  by  the  other  test,  whether 
they  intended  to  be  protected  under  BoviU's  Act  from 
liability  to  third  persons,  then  I  think  they  did  intend  to  be 
protected  from  liability. 

But  it  comes  back  again  to  the  same  point,  namely,  what 
is  the  true  construction  of  the  Act?  Is  what  they  did  within 
the  provisions  of  the  Act,  or  without? 

I  must  say  the  Act  is  not  so  easy  to  construe  as  some 
Acts  are,  and  not  so  difficult  as  some  Acts  are ;  but  it  seems 


252  PARTNER'S  POWER  TO  BIND  COPARTNER 

to  have  been  framed  on  an  impression  that  the  law  of  part- 
nership was  in  a  different  state  from  what  it  actually  was. 
I  should  be  sorry  to  say  that  on  my  own  authority,  but  I  find 
it  stated  in  pretty  plain  terms  by  the  Privy  Council  in  the 
case  of  MoUwo,  March  &  Co.  v.  Court  of  Wards,  and  some- 
thing of  the  same  kind  was  stated  by  other  Judges,  but  being 
Judges  of  Courts  of  first  instance,  I  do  not  refer  to  them. 
The  Privy  Council  said  [Law  Rep.  4  P.  C.  437]  :  "Some 
reliance  was  placed  on  the  statute  28  &  29  Vict.  c.  86,  s.  i, 
which  enacts  that  the  advance  of  money  to  a  firm  upon  a 
contract  that  the  lender  shall  receive  a  rate  of  interest  vary- 
ing with  the  profits,  or  a  share  of  the  profits,  shall  not,  of 
itself,  constitute  the  lender  a  partner,  or  render  him  re- 
sponsible as  such.  It  was  argued  that  this  raised  an  impli- 
cation that  the  lender  was  so  responsible  by  the  law  existing 
before  the  passing  of  the  Act.  The  enactment  is  no  doubt 
entitled  to  great  weight  as  evidence  of  the  law,  but  it  is  by  no 
means  conclusive ;  and  when  the  existing  law  is  shewn  to  be 
different  from  that  which  the  Legislature  supposed  it  to  be, 
the  implication  arising  from  the  statute  cannot  operate  as  a 
negation  of  its  existence." 

Now,  I  am  afraid  that  that  criticism  is  by  no  means  ill- 
founded.  The  first  section  of  the  Act  is  this :  'The  advance 
of  money  by  way  of  loan  to  a  person  engaged,  or  about  to 
engage,  in  any  trade  or  undertaking  upon  a  contract  in  writ- 
ing with  such  person,  that  the  lender  shall  receive  a  rate  of 
interest  varying  with  the  profits,  or  shall  receive  a  share  of 
the  profits  arising  from  carrying  on  such  trade  or  under- 
taking, shall  not,  of  itself,  constitute  the  lender  a  partner 
with  the  person  or  the  persons  carrying  on  such  trade  or 
undertaking,  or  render  him  responsible  as  such." 

The  law  was  decided  before  the  Act,  by  a  long  train  of 
decisions  before  the  time  of  Lord  Eldon,  who  found  it  estab- 
lished. He  says  in  Ex  parte  Hamper  [17  Ves.  403]  that 
the  lending  of  a  sum  of  money  on  a  bona  fide  contract  to 
receive  a  rate  of  interest  varj-ing  with  the  profits,  did  not 
make  a  man  a  partner ;  although,  I  suppose,  I  may  take  it  to 


POOLEY  V.  DRIVER  253 

be  the  equally  well-established  rule,  though  perhaps  not  so 
conclusively  established,  that  the  receiving  of  a  share  of  the 
profits  did  :  the  two  were  lumped  together  by  the  statute,  and 
therefore  it  was  said,  and  rightly  said,  that  there  being,  so 
to  say,  a  misapprehension  of  the  law  which  was  supposed  to 
be  affected  by  the  Act,  you  cannot  look  upon  the  Act  ftself 
as  declaratory  one  way  or  the  other. 

That  being  so,  what  is  the  effect  of  the  Act?  The  Act 
is  this,  that  the  advance  of  money  must  be  "by  way  of  loan." 
Now  what  does  that  mean?  It  is  not  the  ''advance  of 
money,"  but  ''the  advance  of  money  by  way  of  loan."  I 
take  it  to  mean  this,  that  the  person  advancing  must  be  a  real 
lender ;  that  the  advance  must  not  only  profess  to  be  by  way 
of  loan,  but  must  be  a  real  loan;  and  consequently  you  come 
back  to  the  question  whether  the  persons  who  enter  into  the 
contract  of  association  are  really  in  the  position  of  creditor 
and  debtor,  or  in  the  position  of  partners,  or  in  the  only 
third  position  which  I  think  could  be  suggested,  that  of 
master  and  servant.  But  the  Act  does  not  decide  that  for 
you.  You  must  decide  that  without  the  Act ;  and  when  you 
have  decided  that  the  relation  is  that  of  creditor  and  debtor, 
then  all  the  Act  does  is  this :  it  says  that  the  creditor  may 
take  a  share  of  the  profits,  but  as  I  understand  the  law  as  laid 
down  by  the  higher  authorities  to  which  I  have  referred,  if 
you  have  once  decided  that  the  parties  are  in  the  position  of 
creditor  and  debtor  you  do  not  want  the  Act  at  all,  because 
the  inference  of  partnership  derived  from  the  mere  taking  a 
share  of  profits,  not  being  irrebuttable,  is  rebutted  by  your 
having  come  to  the  conclusion  that  they  are  in  the  position 
of  debtor  and  creditor.  That,  in  fact,  was  the  decision  in  the 
case  of  Mollwo,  March  &  Co.  v.  Court  of  JVards  [Law  Rep. 
4  P.  C.  419],  and  in  the  case  of  Cox  v.  Hickman  [8  H.  L.  C. 
268].  Therefore  you  have  already  decided  that  for  your- 
self, and  the  Act  does  not  seem  to  me,  as  far  as  regards  the 
first  section,  to  do  you  any  good  at  all. 

Then  the  only  other  point  is  as  to  the  meaning  of  "shall 
not,   of  itself,   constitute,"   &c.      Xow   there   is   a  possible 


254  PARTNER'S  POWER  TO  BIND  COPARTNER 

meaning  to  be  given  to  the  word  "itself."  It  may  mean  this 
— though  I  am  not  sure  that  it  does — that  in  construing  a 
contract  which,  before  the  Act,  by  the  mere  circumstance  of 
there  being  a  share  in  the  profits,  would  have  raised  a  cogent, 
though  not  an  irrebuttable,  inference  that  the  so-called  lender 
was  a  partner,  though  he  professed  to  be  a  lender,  the  mere 
fact  of  his  taking  profits  shall  not  alone  raise  that  inference. 
Well,  if  that  is  the  meaning — and  I  think  Mr.  Lindley  attrib- 
utes that  meaning  to  it — it  does  not  assist  me  very  much  in 
coming  to  a  decision,  for  of  course  in  this  case  there  are 
many  other  circumstances  besides  participation  in  profits, 
as  I  suppose  there  are  always,  or  nearly  always,  in  these 
cases;  and  in  the  next  place,  as  I  said  before,  I  must  decide 
for  myself  whether  the  parties  are  really  in  the  position  of 
creditor  and  debtor  before  I  can  apply  the  Act  at  all. 

The  words  are,  "advance  of  money  by  way  of  loan," 
and  Mr.  Lindley's  note  [3rd  Ed.  p.  46]  is  this:     "Observe 
these  very  important  words.     Agreements   are   constantly 
framed  with  all  sorts  of  clauses,  which  together  probably 
expose  the  lender  to  the  risks  he  is  desirous  of  avoiding" — 
that  is,  to  the  risk  of  being  a  partner.     I  do  not  know  why 
those  words,  "of  itself,"  were  put  into  the  Act,  unless  it  was 
supposed  by  the  framer — which  is  another  guess  of  my  own, 
and  one  which,  perhaps,  I  ought  not  to  make,  because  it  is 
imputing  to  the   Legislature   a    further   ignorance   of   law 
besides  that  already  imputed  to  them  in  the  Privy  Council 
case — that  sharing  profits  would  otherwise  have  created  a 
partnership  of  itself.     If  you  take  that  meaning,  then  it  is 
an  alteration  of  the  law ;  but  Cox  v.  Hickman  [8  H.  L.  C. 
268]  decided  that  that  was  not  so,  and  never  had  been  so,  for 
of  course  Cox  v.  Hickman  did  not  lay  down  any  new  law — 
the  Lords  say  so  in  their  speeches — and,  consequently,   it 
was  not  true  that  at  any  time  sharing  profits  constituted  a 
lender  a  partner,  though  it  was  a  cogent  test  for  trying  the 
question,  and  would  have  been  irrebuttable  unless  you  could 
have  found  some  circumstances  altering  the  nature  of  the 
contract. 


POOLEY  V.  DRIVER  255 

That  disposes  of  the  law  of  the  case  as  far  as  I  am 
concerned.  I  now  come  to  the  consideration  of  the  details  of 
the  documents,  which  are  certainly  framed  in  a  very  singular 
way.  They  seem  to  me  to  have  been  purposely  framed  with 
a  view  of  giving  the  whole  benefit  which  partnership  could 
give  to  the  contributors,  and,  if  possible,  something  more 
than  they  could  have  obtained  as  partners. 

The  original  deed  of  partnership  is  dated  the  loth  of 
October,  1868;  it  is  made  between  Borrctt  of  the  one  part, 
and  Hagcn  of  the  other.  It  states  that  they  agreed  to  be- 
come partners  "on  the  terms  hereinafter  mentioned ;"  then 
it  states  what  the  trade  should  be,  namely,  the  business  of  a 
grease,  pitch,  and  manure  manufacturer;  then  the  partner- 
ship is  to  commence  on  the  ist  of  July,  1868,  and  is  to  con- 
tinue for  the  term  of  fourteen  years  next  ensuing,  and  to  be 
carried  on  in  the  name  of  Borrett  &  Co. 

The  capital  of  the  partnership  consists  of  £30,000,  and 
is  made  up  as  follows :  the  goodwill — that  is,  the  business 
already  carried  on — is  to  be  taken  at  the  value  of  £15,000; 
Borrctt  is  to  bring  in  a  further  sum  of  £1000,  Hagcn  a 
further  sum  of  £4000,  and  the  remaining  £10,000  is  to  be 
raised  "by  way  of  loan"  under  the  provisions  of  the  Act 
(giving  its  full  title),  "in  sums  of  £500  each  from  persons 
w^illing  to  advance  the  same  for  the  purpose  of  the  said 
partnership;  and  the  said  capital  shall  be  considered  as 
divided  into  sixty  equal  parts  of  £500  each ;  and  the  said 
Charles  Borrett  shall  be  considered  as  the  owner  of  seven- 
teen of  such  parts,  and  the  said  Edward  Hagcn  as  the 
owner  of  twenty-three  of  such  parts,  making  together  forty 
equal  parts  or  shares  of  £500  each  held  by  them  in  the  said 
business;  and  the  remaining  twenty  equal  parts  or  shares 
shall  be  considered  as  appropriated  to  or  for  the  benefit  of 
the  person  or  persons  so  advancing  money  by  way  of  loan  as 
aforesaid  on  the  proportion  on  which  tlie  same  shall  be  ad- 
vanced by  them  res]:)ectively." 

So  that  the  moment  the  contributors  became  parties  to 
this  deed,  as  I  shall  shew  thev  were  or  did  become  after- 


256  PARTNER'S  POWER  TO  BIND  COPARTNER 

wards,  they  became  entitled  to  shares  in  the  capital  abso- 
lutely. Then  it  goes  on,  "The  capital  of  the  said  business 
shall  be  used  and  employed  in  the  regular  course  of  trade 
for  the  benefit  of  the  partnership,  and  shall  not  be  drawn 
out  during  the  continuance  of  such  partnership." 

This  is  a  very  important  clause,  when  you  consider 
that  the  contributors  get  the  benefit — as  I  shall  shew  pres- 
ently they  do — of  every  covenant  in  the  deed  of  partnership. 
The  result,  therefore,  is  this,  that  they  became  not  only 
entitled  to  the  shares  of  the  capital,  but  entitled  to  compel 
the  ostensible  partners  to  employ  that  capital  in  the  regular 
course  of  trade,  and  might  have  obtained  an  injunction  to 
prevent  their  diverting  it  to  any  other  purpose.  They  had 
therefore,  to  that  extent,  a  control  over  the  capital,  namely, 
a  control  over  its  employment ;  thus  they  were  not  at  all 
in  the  ordinary  position  of  lenders. 

The  lender  does  not  become  entitled  to  any  part  of  the 
assets  of  his  debtor  in  specie.  He  has  only  a  contract  which 
entitles  him  to  claim  payment  from  the  debtor  as  a  personal 
demand,  but  this  supposed  creditor  becomes  entitled  to  a 
portion  of  the  capital  in  specie,  and  gets  the  right  besides  to 
prevent  the  legal  owners  of  the  property  from  applying  it  to 
any  other  than  a  particular  purpose,  whether  they  desire  to 
do  so  or  not.  He  acquires  two  rights,  the  right  to  an  aliquot 
portion  of  the  capital  itself,  and  a  right  to  control  the  dis- 
posal of  the  rest  of  the  capital. 

Then  there  is  a  covenant  that  the  partners  shall  conduct 
the  business  during  the  partnership  to  the  best  of  their 
ability.  Let  us  test  the  case  by  that  covenant.  The  lender 
can  compel  these  people  against  their  will  to  carry  on  the 
business — I  do  not  mean  to  say  he  can  actually  make  them 
carry  on  the  business,  because  that  is  a  covenant  which  a 
Court  of  Equity  always  declines  to  enforce,  but  he  could 
have  an  action  for  damages  against  them  for  breach  of  the 
covenant,  and  at  all  events  he  gets  the  benefit  of  that  contract. 
They  must  carry  on  the  business,  as  I  shall  shew  presently, 
for  his  benefit,  because  they  have  contracted  to  do  so. 


POOLEY  V.  DRIVER  257 

Then  the  7th  clause  is  that  proper  books  of  account  and 
other  books  shall  be  kept  in  the  usual  way.  Then  there  is  a 
provision  that  the  partners  shall  not  sell,  lend,  or  borrow 
without  mutual  consent;  then  that  they  shall  not  allow  the 
assets  to  be  taken  in  execution ;  and  then  that  neither  part-ner 
shall  take  any  servants  without  the  consent  of  the  other. 
Then  there  is  a  provision  as  to  outgoings;  then  a  provision 
for  one  of  the  ostensible  partners  drawing  out  certain  sums 
for  maintenance.  Then,  that  on  the  ist  of  July  in  every 
year  a  general  account  shall  be  taken,  and  a  general  valuation 
made  in  the  usual  way,  and  put  into  a  book.  Then  the  14th 
clause  is  this,  which  is  very  important : 

"The  net  profits  arising  from  the  business  of  the 
said  partnership  shall  be  divided  into  sixty  equal  parts  or 
shares,  and  the  said  C.  Borrett  shall  be  entitled  to  seventeen 
of  such  parts  or  shares,  and  the  said  E.  Hagen  to  twenty- 
three  of  such  parts  or  shares ;  and  the  remaining  twenty  o£ 
such  parts  or  shares  shall  be  divided  amongst  the  persons  ad- 
vancing the  sum  of  £10.000  so  to  be  raised  by  way  of  loan  as 
aforesaid  in  proportion  to  the  amounts  advanced  by  them 
respectively:  Provided  always,  that  if  the  whole  of  the  said 
sum  of  £10,000  shall  not  be  raised  by  way  of  loan,  and  until 
the  sum  shall  be  so  raised,  the  net  profits  arising  from  the 
business  of  the  said  partnership  shall  be  divided  into  as  many 
parts  or  shares  as  there  shall  be  sums  of  £500  in  the  capital 
of  the  said  partnership,  such  capital  being  estimated  in 
manner  hereinbefore  provided,  and  be  paid  on  the  ist  day 
of  October  in  every  year  to  them  respectively,  on  account  of 
their  respective  shares  in  the  clear  gains  and  profits  of  the 
said  partnership." 

The  moment  the  contributors  got  the  benefit  of  this 
they  were  clearly  entitled  to  a  share  of  the  profits  as  profits. 
Nothing  can  be  plainer  than  the  terms  of  the  provision,  and 
it  shews  the  intention  of  the  parties. 

Then  the  15th  clause  is  this: 

"Within  six  calendar  months  after  the  expiration  or 
sooner  determination  of  the  partnership,  otherwise  than  by 


25S  PARTNER'S  POWER  TO  BIND  COPARTNER 

the  death  of  one  of  the  partners,  a  final  statement  of  ac- 
counts in  writing  shall  be  forthwith  made  by  and  between 
the  said  parties  hereto,  of  and  concerning  all  the  goodwill, 
stock  in  trade,  plant,  moneys,  credits  and  effects  then  due 
or  belonging  to  the  said  partnership,  and  also  of  all  debts 
and  sums  of  money  due  and  owing  from  and  of  all  liabilities 
of  the  same,  and  a  just  valuation  shall  be  made  of  all  the 
particulars  included  in  such  account  which  shall  require  and 
are  capable  of  valuation,  and,  immediately  after  such  last 
mentioned  account  shall  have  been  so  taken  and  settled,  the 
partners  shall  forthwith  pay  to  the  persons  advancing  money 
by  way  of  loan  for  the  capital  of  the  partnership,  as  herein- 
before provided,  the  moneys  advanced  by  them  respectively, 
less  any  sums  overpaid  to  them  on  account  of  the  profits 
of  the  said  partnership,  and  shall  make  due  provision  for 
the  payment  of  all  other  moneys  and  debts  then  due  by  the 
partnership,  and  for  meeting  all  the  liabilities  thereof,  and 
shall  divide  all  the  profits  arising  and  which  shall  have 
arisen  from  the  business  of  the  said  partnership  in  the  pro- 
portions specified  in  the  14th  clause  of  these  presents,  and 
shall  then  appropriate  the  sum  of  £1000  for  the  benefit  of 
the  said  C.  Borrctt,  in  satisfaction  of  two  of  his  shares  in 
the  partnership  assets,  and  the  sum  of  £4000  for  the  benefit 
of  the  said  E.  Hagen  in  satisfaction  of  eight  of  his  shares 
therein,  such  two  last  mentioned  sums  to  be  paid  pro  rata 
and  pari  passu;  and,  subject  thereto,  the  goodwill  and  other 
assets,  if  any,  then  belonging  to  the  partnership,  shall  be 
divided  between  the  partners  in  equal  shares  .    .    ." 

Then  there  is  a  provision  to  this  effect,  that  if  either  of 
the  partners  becomes  bankrupt  the  other  shall  have  liberty 
to  dissolve,  and  then  the  property  shall  become  the  property 
of  the  non-bankrupt  partner  upon  his  paying  the  value  of 
the  bankrupt  partner's  share  to  his  assignees. 

Then  there  is  a  provision  for  the  widow  or  children  of 
the  partners;  then  a  provision  in  the  event  of  the  death  of 
either  partner,  which  I  do  not  think  it  necessary  to  read, 
and  some  other  provisions   as   regards  death,   which  pre- 


I 


POOLEY  V.  DRIVER  •       259 

cede  the  last  clause,  which  is  the  usual  arbitration  clause. 
That  is  the  partnership  deed. 

Now  we  come  to  the  other  deeds,  which  for  this  pur- 
pose I  treat  as  deeds  of  even  date.  They  are  not  exactly 
of  even  date,  but  they  are  nearly  contemporaneous.  The 
partnership  dates  from  the  loth  of  October,  1868.  The  ar- 
rangement made  with  Messrs.  Driver  was  made  somewhere 
about  the  same  time,  and  was  made  by  a  document  which 
was  never  executed.  It  was  a  draft  of  an  indenture  dated 
the  day  of  October,  1868.     I  may  say,  in  passing,  that 

the  other  deeds,  those  executed  by  Bannatyne  &  Pye,  are 
about  the  same  date — one  being  dated  the  28th  of  October, 
1868,  and  the  other  the  7th  of  November,  1868 — and  are 
in  the  same  terms,  and  I  will  take  them  as  having  been  exe- 
cuted shortly  after  the  partnership. 

Messrs.  Driver's  document  recites  the  partnership  deed; 
it  recites  some  of  the  provisions  that  I  have  read ;  and  then 
it  goes  on :  "Whereas  the  said  Rolles  Driver  and  Samuel 
Neale  Driver  have  agreed  to  advance  by  way  of  loan  to  the 
said  C.  Borrett  and  E.  Hagen,  under  the  provisions  of  an 
Act  of  Parliament  passed  in  the  28th  and  29th  years  of  Her 
present  ]\Iajesty,  c.  86,  entitled,  'An  Act  to  amend  the  Law 
of  Partnership'  the  sum  of  £2500,  to  enable  them  the  said 
C.  Borrett  and  E.  Hagen  to  carry  on  the  said  trade  or 
business  for  the  term  and  under  and  subject  to  the  stipula- 
tions and  conditions  hereinafter  mentioned,  expressed,  and 
declared  concerning  the  same."  Then  it  is  witnessed,  "That 
in  consideration  of  the  sum  of  £2500,"  (Sec,  the  said  Borrett 
and  Hagen  first  of  all  covenant  that  they,  Borrett  and 
Hagen,  "will  within  six  calendar  months  after  the  ist  of 
July,  1882,  or  within  six  calendar  months  after  the  sooner 
determination  of  the  said  partnership,  pay  unto  the  said 
Rolles  Driver  and  Samuel  Neale  Driver,  their  executors, 
administrators,  or  assigns,  the  sum  of  £2500." 

That  is  a  very  remarkable  thing  for  a  loan.  It  is  a 
loan  during  the  continuance  of  the  partnership.  It  is  to  be 
paid  within  six  calendar  months  after  its  natural  expiration, 


260         -PARTNER'S  POWER  TO  BIND  COPARTNER 

or  within  six  months  after  any  other  expiration  of  the 
partnership.  Therefore,  although  they  call  it  a  ''loan," 
and  although  I  agree  that,  standing  alone,  the  fact  of  the 
duration  of  the  loan  being  the  duration  of  the  partnership 
might  not  of  itself  be  conclusive,  it  all  tends  in  the  same 
way  to  shew  that  this  was  really  intended  as  an  advance 
of  capital  to  the  partnership  business,  made  for  the  purpose 
of  carrying  it  on,  and  not  as  an  ordinary  loan. 

The  next  clause — and  this  is  very  important — is : 
"That  the  said  C.  Borrctt  and  E.  Hagcn,  their  respective 
executors,  and  administrators,  shall  in  all  things  conform 
to,  fulfil,  and  observe  the  covenants,  clauses,  and  agreements 
contained  in  the  said  recited  deed  of  partnership  of  the  loth 
day  of  October,  1868,  and  such  deed  of  partnership  shall 
at  all  times  be  open  to  the  inspection  of  the  said  Rollcs 
Driver  and  Samuel  Nealc  Driver,  their  executors  or  admin- 
istrators, at  the  office  where  the  said  business  shall  be  carried 
on."  That  imports  the  whole  of  the  provisions  of  the  prior 
deed  into  this  deed,  and  makes  Borrctt  and  Hagen  covenant 
to  observe  them,  thus  giving  to  the  Drivers  those  rights  both 
with  respect  to  capital  and  profits  which  I  have  already  ad- 
verted to. 

Then  the  next  clause  provides  i\\2.\.'Borrett  and  Hagcn 
will,  during  the  continuance  of  the  loan — that  is,  during 
the  maintenance  of  the  partnership — make  out  accounts,  and 
once  a  year,  on  the  ist  of  October,  pay  Messrs.  Driver,  on 
account  of  profits,  a  sum  equivalent  to  five-sixtieth  parts 
of  the  profits  for  the  year  preceding  the  ist  of  July  then 
last  past.  Some  argument  was  rested  upon  that,  but  noth- 
ing turns  upon  it,  for  this  covenant  never  actually  came 
into  existence.  If  it  had,  I  should  have  held  that  it  did 
not  vary  the  case  in  the  least;  that  the  prior  clause  gave 
them  a  share  of  proceeds  as  profits  under  the  partnership, 
and  this  only  makes  Borrctt  and  Hagcn  pay  on  account  of 
the  profits  a  sum  equivalent  to  five-sixtieth  parts,  shewing 
that  what  they  had  to  pay  really  was  still  profits.  But  that 
clause  never  came  into  force,  because  there  was  a  proviso 


POOLEY  V.  DRIVER  261 

at  the  end  of  it  to  this  effect,  that  if  the  sum  of  £10,000  was 
not  advanced — and  it  was  not — then  Borvctt  and  Hagcn 
or  one  of  them,  would  "on  the  ist  day  of  October  in  every 
year  during  the  continuance  of  the  said  loan  pay  to  the  said 
Rolles  Driver  and  Samuel  Neale  Driver,  their  executors,  ad- 
ministrators, or  assigns,  in  lieu  of  the  said  five  equal  sixtieth 
parts  of  the  said  clear  gains  and  profits  as  last  aforesaid, 
such  a  proportion  of  the  said  clear  gains  and  profits  as  last 
aforesaid  as  the  said  sum  of  £2500  bears  to  the  whole  cap- 
ital for  the  time  being  employed  in  the  same  business,  such 
capital  being  estimated  in  the  manner  provided  by  the  said 
indenture  partnership." 

So  that  we  have  the  interest  of  the  loan  not  varying 
merely  with  the  profits  of  the  business,  but  varying  in  the 
proportion  which  the  loan,  which  was  part  of  the  capital, 
bore  to  the  whole  capital,  a  circumstance  which  I  think  by 
no  means  immaterial  in  shewing  that  it  was  not  a  gen- 
uine loan  in  the  sense  of  creating  the  relation  of  debtor  and 
creditor,  but  that  it  was  indeed  an  advance  of  part  of  the 
capital. 

Then  the  deed  goes  on  with  a  very  remarkable  provi- 
sion, "That  if  either  the  said  Rolles  Driver  or  Samuel  Neale 
Driver  shall  become  bankrupt  or  shall  compound  with  his 
creditors,  or  in  case  any  difference  or  dispute  shall  at  any 
time  during  the  said  term  of  fourteen  years  arise  between 
the  said  parties  hereto,  or  their  representatives,  and  which 
differences  or  disputes  shall  be  considered  by  arbitration,  as 
hereinafter  mentioned,  to  justify  the  determination  of  the 
arrangement  hereby  agreed  upon,  it  shall  be  lawful  for  the 
said  C.  Barrett  and  E.  Hagen,  or  the  survivor  of  them,  or 
their  or  his  executors  and  administrators  at  any  time  here- 
after to  pay  the  said  sum  of  £2500,  less  any  sum  they  shall 
have  been  overpaid  on  account  of  the  said  business,  to  the 
said  Rolles  Driver  and  Samuel  Neale  Driver,  their  execu- 
tors, administrators,  or  assigns,  together  with  the  share  of 
the  said  profits  (if  any)  to  which  the  said  Rolles  Driver  and 
Samuel  Neale  Driver,  their  executors,   administrators,   or 


262         PARTNER'S  POWER  TO  BIND  COPARTNER 

assigns,  shall  then  have  become  entitled;"  and  thereupon  the 
agreement  is  to  be  at  an  end. 

Now  that  certainly  is  a  very  astonishing  provision  in 
an  ordinary  contract  of  loan.  What  has  the  bankruptcy  of 
the  creditor  got  to  do  with  it?  You  pay  the  assignee,  or 
trustee,  as  he  is  now  called.  It  is  a  very  remarkable  thing 
that  the  bankruptcy  of  the  creditor  should  put  an  end  to 
the  agreement,  but  you  find  it  by  no  means  remarkable  if 
it  was  intended  that  they  should  really  be  partners.  You 
find  a  similar  provision  in  the  actual  partnership  deed. 
Without  attaching  too  much  weight  to  this,  I  think  it  is 
very  material. 

Then  there  is  another  remarkable  clause :  "Within  six 
calendar  months  after  the  expiration  or  sooner  determina- 
tion of  the  partnership,  a  final  settlement  of  the  accounts 
of  the  partnership  shall  be  forthwith  made  in  writing  by 
the  said  C.  Borrctt  and  E.  Hagcn,  their  executors  or  admin- 
istrators, concerning  all  the  stock-in-trade,  plant,  moneys, 
credits,  and  effects  then  due  or  belonging  to  the  said  part- 
nership estate,  and  also  of  all  debts  and  sums  of  money  (if 
any)  due  or  owing  from,  and  of  all  liabilities  of  the  same, 
and  a  just  valuation  shall  be  made  of  all  the  particulars  in- 
cluded in  such  account  which  shall  require  and  are  capable 
of  valuation,  and  immediately  after  such  last-mentioned  ac- 
count shall  have  been  so  taken  and  settled,  the  said  C.  Bar- 
rett and  E.  Hagcn  shall  forthwith  pay  thereout  to  the  said 
Rollcs  Driver  and  Samuel  Neale  Driver,  their  executors, 
administrators,  or  assigns,  the  sum  of  £2500."  So  that  the 
covenant  is  in  accordance  with  the  partnership  deed  to  pay 
the  £2500  out  of  the  assets  and  debts  due  to  the  partnership. 
I  know  there  is  another  covenant  to  pay  Messrs.  Driver 
which  is  personal,  but  there  stands  a  covenant  to  pay  out 
of  the  assets. 

Then  there  is  a  provision  for  payment  to  the  Drivers 
of  "five  equal  sixtieth  parts  or  shares  of  all  the  net  profits 
of  the   said  business."     That   gives  them   all   the   surplus 


POOLEY  V.  DRIVER  263 

profits  that  they  have  not  yet  received,  including  the  pro- 
23ortion  of  the  capital  they  are  entitled  to. 

Then  there  is  the  proviso  that  they  shall  refund.  It 
is  very  oddly  worded,  but  it  is  agreed  on  all  hands  that  it 
means  this,  that  if,  at  the  end  of  the  partnership  period,  the 
amount  already  paid  to  the  Drivers  for  profits  shall  exceed 
the  total  profits  made  in  the  business,  they  shall  refund  the 
excess  not  exceeding  the  £2500.  I  have  rather  given  the 
effect  than  the  words,  because  the  words  are  somewhat  am- 
biguous; but  it  is  admitted  that  that  must  be  the  meaning, 
or,  in  other  words,  that  the  lender,  having  received  profit  for 
interest,  if  the  business  afterwards  makes  a  loss,  would 
have  to  pay  back,  subject  to  the  limit  that  he  is  never  to 
be  called  upon  to  pay  more  than  he  has  received,  and,  sub- 
ject also  to  this,  that  he  is  never  to  be  called  upon  to  pay 
more  than  the  total  amount  of  his  so-called  loan.  It  is 
certainly  a  wonderful  provision,  if  it  is  a  bond  fide  loan, 
and  not  a  mere  colourable  transaction  to  get  a  share  of  the 
profits  without  being  liable  to  losses.  Did  ever  any  one  hear 
of  anybody  lending  his  money  on  such  terms,  or  of  the 
notion  that,  after  having  received  the  profits  in  lieu  of  inter- 
est, he  is  to  pay  back  the  whole  of  them,  it  may  be,  because 
subsequently  the  business,  conducted  not  for  him,  but  for 
other  people,  who  are  really  his  debtors,  shall  have  given 
rise  to  losses?  It  appears  to  me  that  if  you  want  to  prove 
that  the  business  was  conducted  for  him,  this  is  cogent 
evidence  of  it.  It  was  not  conducted  entirely  for  the  benefit 
of  the  persons  who  were  merely  debtors  and  who  stood  in 
that  relation  to  the  supposed  creditor. 

Then  there  is  an  arbitration  clause,  which  is  very  usual 
in  partnership  articles,  but  not  a  very  usual  one  in  a  mere 
loan  deed. 

These  are  the  documents  on  which  I  am  called  upon  to 
decide,  and  I  must  say  that  I  have  come  to  a  clear  conclu- 
sion that  this  is  not  a  transaction  of  loan  within  the  mean- 
ing of  the  Act  of  Parliament ;  that  the  true  relation  of  the 
parties  towards  one  another  was  that  of  dormant  and  active 


264  PARTNER'S  POWER  TO  BIXD  COPARTNER 

partners,  and  not  of  mere  creditors  and  debtors ;  that  in 
this  case  I  need  not  rely  on  one  provision  or  on  two  provi- 
sions, but  on  the  whole  character  of  the  transaction  from  be- 
ginning to  end.  It  is  an  elaborate  device,  an  ingenious  con- 
trivance, for  giving  these  contributors  the  whole  of  the  ad- 
vantages of  the  partnership,  without  subjecting  them,  as 
they  thought,  to  any  of  the  liabilities.  I  think  the  device 
fails ;  and  that,  looking  at  the  law  as  it  stands,  I  must  hold 
that  they  are  partners,  and  liable  to  the  consequences  of 
being  partners,  and  to  the  whole  of  the  engagements  of  the 
partnership,  and  consequently  liable  for  the  whole  of  its 
debts. 

The  Plaintiff  is,  therefore,  entitled  to  a  judgment  on 
these  bills. 


HART  V.  KELLEY  265 


HART  z'.  KELLEY. 
In  the  Supreme  Court  of  Pennsylvania,  1877. 

83  Pennsylvania  Reports,  287. 

Assumpsit  by  H.  H.  Kelley  against  A.  Hart,  Pincus, 
Faucett,  Sauter  and  Clarence  A.  Hart,  for  work  and  labor 
alleged  to  have  been  done  about  the  defendants'  property, 
as  shown  by  the  copy  of  book  entries  filed. 

The  defendant,  C.  A.  Hart,  filed  an  affidavit  of  defence 
in  which  he  set  forth  that  his  only  connection  with  Pincus 
and  Faucett  was  this :  that  after  the  work  to  recover  for 
which  the  suit  was  brought,  was  in  a  great  part  performed, 
he  signed  an  agreement  with  Pincus  and  Faucett  to  advance 
them  money  in  their  business,  and  to  receive,  in  lieu  of  in- 
terest, a  share  in  the  net  profits  of  the  firm ;  that  he  never 
did  advance  any  money  under  this  agreement,  but,  on  the 
contrar}',  the  agreement  was  rescinded  immediately  after  it 
was  made. 

The  Court  below  entered  judgment  for  want  of  a  suffi- 
cient affidavit  of  defence;  whereupon  C.  A.  Hart,  one  of 
the  defendants,  brought  this  writ  of  error,  assigning  this 
judgment  for  error. ^ 

PaxsoNj  J. : 

The  rule  of  the  law  formerly  prevailing,  that  partici- 
pation in  the  net  profits  of  a  business  made  a  participant 
liable  to  third  parties  as  a  partner,  has  been  greatly  modified 
in  England  and  this  country.  Thus,  in  Dean  ■:■.  Harris, 
and  Harris  z'.  Butterfield,  Law  Times  Reports,  N.  S.,  vol. 
33,  p.  639,  Butterfield,  who  was  a  person  of  small  means, 
applied  to  Harris  to  advance  him  money  for  the  purpose  of 
developing  certain  mines.  Harris  consented  to  lend  But- 
terfield 2000/.,  upon  certain  terms,   viz. :   That  B.   having 

^  The  facts  as  given  by  th.e  Reporter  are  restated. 


266         PARTNER'S  POWER  TO  BIND  COPARTNER 

entered  into  an  agreement  to  take  a  lease  of  the  Leycett 
mines,  that  the  said  mines  be  worked  under  the  style  or 
firm  of  the  Leycett  Mining  Co. ;  that  said  H.  find  capital  to 
work  the  mines  to  an  extent  not  exceeding  2000/.;  that  the 
money  so  advanced  shall  be  repaid  with  20  per  cent,  interest ; 
the  said  H.  to  be  paid  2)d.  per  ton  on  all  coal  and  iron  stone, 
by  way  of  commission.  The  said  B.  to  be  paid  200/.  per 
annum  by  way  of  salary,  but  not  to  take  date  until  the  sum 
or  sums  advanced  by  said  H.  be  repaid;  said  B.  to  promote 
the  interest  of  the  concern  and  continue  in  receipt  of  salary 
so  long  as  he  should  conduct  the  business  to  the  satisfaction 
of  H.  After  payment  of  the  above,  and  costs  of  raising  and 
preparing  and  delivering  to  market  the  product  of  said 
mines,  said  H.  shall  be  entitled  to  three-fourths  of  the 
profits,  and  all  the  net  proceeds  of  the  concern  to  be  dis- 
posed of  in  the  like  proportion ;  said  H.  to  be  free  from  all 
liability  except  in  respect  of  the  money  advanced  by  him. 
The  vice-chancellor  held,  that  there  was  no  partnership, 
saying:  "All  that  H.  did  was  consistent  with  his  character 
as  capitalist,  assisting  B.  in  carrying  on  business.  All  that 
is  said  to  constitute  a  partnership.  If  it  could,  it  would 
be  most  unsafe  for  any  man  to  lend  a  tradesman  any  sum 
of  money,  and  to  look  after  the  best  means  he  could  get  for 
its  fepaym.ent."  Mollwo,  March  &  Co.  v.  The  Court  of 
Wards,  Law  Rep.  4  P.  C.  419,  is  perhaps  a  stronger  case 
than  Dean  v.  Harris.  To  the  same  point  is  Cox  v.  Hick- 
man, House  of  Lords  Cases,  vol.  8,  p.  268.  In  this  state 
the  Act  of  6th  April  1870.  Purdon  1121,  pi.  15  (Pamph. 
L.  56),  expressly  provides  that,  "it  shall  be  lawful  for  any 
person  or  persons  to  loan  money  to  any  individual,  firm, 
association  or  corporation,  doing  business  in  this  Common- 
wealth, upon  agreement  to  receive  a  share  of  the  profits 
of  such  business  as  compensation  for  the  use  of  the  money 
so  loaned,  in  lieu  of  interest,  and  such  agreement,  or  the 
reception  of  profits  under  such  agreement,  shall  not  render 
the  person  or  persons  liable  as  a  co-partner  in  such  business 
to  other  creditors  of  such  individual,  firm,  association,  ex- 


HART  V.  KELLEY  267 

cept  as  to  the  money  loaned,"  &c.,  &c.  It  is  by  the  Hght 
of  the  law  thus  modified  by  judicial  decision  and  legislative 
enactment  that  we  must  examine  and  construe  the  agree- 
ment of  December  13th  1875,  which  was  attached  to  the 
supplemental  affidavit  of  defence,  and  forms  a  part  there- 
of. We  assume  that  the  court  below  held,  that  this  agree- 
ment, as  to  the  parties  thereto,  created  a  partnership  inter  sc. 
In  any  other  view  of  the  case  the  supplemental  affidavit  of 
defence  was  ample  to  prevent  judgment.  The  agreement 
was  evidently  drawn  by  a  layman  and  was  probably  intended 
to  come  within  the  provisions  of  the  Act  of  1870.  So  far 
as  the  defendant  below  is  concerned,  it  provides  for  two 
things,  viz.:  ist.  A  loan  or  advance  by  him  to  Faucett  and 
Pincus  of  such  an  amount  of  money  as  may  be  necessary 
to  enable  the  latter  to  carry  on  the  restaurant  at  No.  1220 
Chestnut  street  for  one  year;  and  2d.  A  division  of  the 
profits  after  such  loan  or  advances  are  repaid.  If  the  de- 
fendant can  be  held  liable  at  all  to  creditors  under  said 
agreement  it  must  be  by  reason  of  his  right  to  a  participa- 
tion in  the  profits.  It  is  not  alleged  that  he  held  himself  out 
to  the  world  as  a  partner,  and  that  any  one  was  induced 
to  give  credit  to  Faucett  and  Pincus  by  reason  of  his  con- 
nection with  them.  The  advance  of  the  money  would  not 
of  itself  constitute  the  defendant  a  partner.  The  partici- 
pation in  the  profits  might  make  him  one,  but  not  neces- 
sarily so.  It  would  depend  upon  the  intention  of  the  par- 
ties as  expressed  by  the  terms  of  their  agreement.  There 
were  to  be  no  profits  divided  until  the  advances  were  re- 
paid. 

If,  as  was  alleged  upon  the  argument,  no  profits  were 
ever  made,  and  of  course  none  divided,  and  the  advances 
were  not  even  repaid,  the  time  never  arrived  when  the  de- 
fendant became  a  partner  by  reason  of  his  participation  in 
the  profits.  This  was  precisely  the  case  in  Dean  v.  Harris, 
supra,  in  which  the  vice-chancellor  held  that  a  participa- 
tion in  the  profits  might  have  made  Harris  liable  as  a 
partner,  but  inasmuch  as  the  business  was  unprofitable  and 


268         PARTNER'S  POWER  TO  BIND  COPARTNER 

no  profits  were  ever  made,  he  could  not  be  held  for  such 
reason.  Here  the  defendant  pointedly  denies  any  partici- 
pation in  the  profits.  Such  denial  ought  to  have  carried 
the  case  to  a  jury.  Again,  he  swears  distinctly,  that  he 
never  acted  under  said  agreement,  being  unable  to  comply 
and  advance  the  money,  and  that  as  to  him  said  agreement 
was  rescinded  iuuiicdiafcly  after  its  execution.  If  this  be 
so,  and  we  are  bound  to  assume  it,  he  would  not  be  liable 
in  any  view  we  may  take  of  the  agreement,  for  any  debt 
incurred  after  his  withdrawal,  at  least  not  to  a  creditor  who 
never  had  knowledge  of  said  agreement,  and  never  trusted 
I'^aucett  and  Pincus  on  that  account.  Aside  from  all  this, 
however,  this  suit  is  for  a  claim  against  Faucett  and  Pin- 
cus, upon  a  contract  made  with  them  prior  to  the  agree- 
ment of  December  13th.  For  the  purposes  of  this  case 
we  must  treat  said  agreement  as  of  the  date  of  January 
7th,  the  defendant  having  sworn  that  the  date  of  December 
13th  was  erroneous.  A  large  proportion  of  the  work  was 
done  prior  to  January  7th.  Assuming  the  defendant  to 
have  become  a  partner,  he  did  not  assume  the  debts  of 
Faucett  and  Pincus.  There  is  not  a  word  in  the  agreement 
which  binds  him  to  pay  any  of  their  old  debts.  A  partner 
who  enters  a  firm  already  established,  does  not  tliereby  be- 
come liable  for  the  debts  of  the  old  firm.  Nothing  but  an 
express  agreement  will  render  him  so  liable.  If  it  be  said 
that  as  to  so  much  of  the  work  as  was  done  after  January 
7th,  it  enured  to  the  benefit  of  the  defendant,  the  answer 
is  that  the  fact  is  not  so.  He  acquired  no  title  to  the  lease- 
hold and  fixtures  by  reason  of  the  agreement.  They  were, 
and  continued  to  be  the  property  of  Faucett  and  Pincus. 
The  clause  in  the  agreement  that  "the  cost  of  fitting  up 
the  said  premises,  as  well  as  all  outlay  for  furnishing,  &c., 
shall  be  considered  as  expenses  to  be  first  deducted  before 
dividing  any  profits,"  does  not  render  the  defendant  liable 
for  a  debt  which  he  never  contracted.  In  the  most  favor- 
able^ light  for  the  plaintiff,  it  is  but  an  assumption  of  his 
claim  so  far  as  there  may  be  profits  out  of  which  to  pay  it. 


HART  V.  KELLEY  269 

He  merely  agrees  that  it  may  be  paid  out  of  profits  before 
his  own  claim  for  advances.  This  imposes  no  personal  re- 
sponsibility upon  him. 

We  think  this  case  ought  to  have  gone  to  a  jury.     We 
therefore  reverse  the  judgment  and  award  a  procedendo^ 


'  Compare:  Poundstonc  v.  Hamburger,  139  Pa.  319,  1891.  (B,  a 
distiller,  was  indebted  to  A.  It  was  agreed  that  A  should  loan  B  a 
further  sum  and  that  B  should  sell  all  the  product  of  the  distillery  to  A 
at  certain  prices,  and  pay  A  one-half  the  profits  until  the  loan  and  the 
original  indebtedness  was  repaid.  B  then  sold  his  distillery  to  A,  part 
of  the  consideration  being  the  cancellation  of  the  indebtedness  of  B  to  A. 
Held,  that  under  the  Act  of  April  6th,  1870,  recited  in  the  principal  case, 
A  was  liable  to  the  creditors  of  the  business  to  the  amount  of  B"s  indebt- 
edness to  him,  which  the  Court  held  he  had  drawn  out  of  the  business 
by  the  arrangement  in  regard  to  the  purchase  of  the  distillery;  and  the 
Court,  per  Sterrett,  J.,  expressed  the  opinion  that  under  the  agreement 
existing  prior  to  the  sale  A  and  B  were  partners.) 


270  PARTNER'S  POWER  TO  BIND  COPARTNER 


ASH  V.  GQIE. 
In  the  Supreme  Court  of  Pennsylvania,  i88i. 

97  Pennsylvania  Reports,  493. 

Assumpsit,  by  William  H.  Guie  to  the  use  of  J.  Alfred 
McCaughey,  against  Phineas  A.  Ash,  Horace  A.  Beale, 
James  Mullen,  executor  of  James  C.  Roberts,  deceased,  and 
over  one  hundred  others,  "lately  trading  as  Williamson 
Lodge,  No.  309,  A.  Y.  M." 

The  plaintiff's  demand  was  founded  on  a  claim  for 
money  loaned  to  the  defendants,  which  was  received  by 
them,  and  used  by  them  in  the  business  in  which  they  were 
then  engaged,  for  which  the  defendants  issued  to  the  plain- 
tiff a  certificate  of  indebtedness. 

The  evidence  showed  the  following  facts :  The  Wil- 
liamson Lodge  of  Ancient  York  Masons,  No.  309,  was  an 
unincorporated  association  for  charitable,  benevolent  and 
social  purposes,  the  officers  of  which  were  a  Worshipful 
Master,  Senior  Warden,  Junior  Warden,  Treasurer,  Sec- 
retary and  a  Board  of  three  Trustees.  The  trustees  had 
charge  of  the  property  of  the  lodge,  took  the  title  to  land, 
collected  the  income  and  extra  funds  of  the  lodge,  &c.  The 
lodge  had  a  seal,  which  was  used  for  authenticating  certi- 
ficates of  membership,  communications  by  the  secretary 
with  other  lodges,  and  for  similar  purposes.  About  the 
year  1867  the  lodge  desired  to  erect  a  building  for  lodge 
purposes.  The  master,  at  a  meeting  of  the  lodge  on  Sep- 
tember 13th  1867  (without  any  prior  resolution  authoriz- 
ing him  so  to  do,  so  far  as  appeared  in  evidence),  appointed 
a  committee  of  five,  consisting  of  the  three  trustees  and 
two  other  members,  to  select  a  lot,  procure  plans  for  a  new 
building,  &c.  The  temple  or  building  was  erected  under 
the  direction  of  this  committee  of  five.  They  appointed 
their  own  treasurer,  collected  funds  and  issued  certificates 


ASH  V.  GUIE  271 

therefor,  of  which  that  in  suit  is  one,  signed  by  the  wor- 
shipful master,  the  senior  and  junior  wardens,  attested  by 
the  secretary  and  authenticated  by  the  seal  of  the  lodge. 
The  committee  was  not  specially  authorized  to  give  said 
certificates,  but  it  was  the  custom  of  the  lodge  to  issue  like 
instruments  whenever  it  borrowed  moneys.  Prior  to  the 
use  of  the  seal  on  these  certificates,  it  had  never  been  at- 
tached to  any  pecuniary  obligation.  The  committee  re- 
ported to  the  lodge  from  time  to  time,  and  its  action  was 
approved  by  the  lodge. 

The  defendants  presented  several  points  among  which 
was  the  following: 

The  defendants'  a'ssociation  was  not  such  a  partnership 
as  is  chargeable  for  the  acts  of  any  members  of  the  asso- 
ciation, and  no  person  who  was  not  present  at  the  time 
that  any  of  the  actions  bearing  upon  this  matter  were  pre- 
sented to  the  lodge  can  be  held  responsible  in  this  suit.^ 

The  court  charged  the  jury  as  follows :  "The  questions 
involved  in  this  case  are  questions  of  law.  The  points  will 
be  reserved  by  the  court  for  future  consideration.  We 
direct  you  to  render  a  verdict  for  the  plaintiff  for  the 
amount  of  his  claim,  and  the  questions  raised  during  the 
trial  will  be  more  fully  considered  hereafter." 

Verdict  accordingly  for  the  plaintiff  for  $i6o.  The 
court  subsequently  entered  judgment  for  the  plaintiff  on 
the  reserved  points. 

The  defendant  took  this  writ  of  error.- 

Mr.  Justice  Trunkey:^ 

One  of  the  defendants,  called  by  plaintiffs,  testified : 
"The  full  title  of  our  lodge  is  Williamson  Lodge,  No.  309, 
F.  and  A.  ]M. ;  F.  and  A.  ]\I.  means  Free  and  Accepted  ^Ma- 
sons :  the  purposes  of  our  lodge  are  charitable,  benevolent 


'  Only  so  much  of  the  Reporters  statement  of  the  facts  of  the  case 
as  is  necessary  to  understand  this  point  is  reprinted. 

The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 

Only  so  much  of  the  opinion  is  given  as  relates  to  the  question 
raised  by  the  defendant's  point  recited  in  the  statement  of  facts. 


272  PARTNER'S  POWER  TO  BIND  COPARTNER 

and  social."  This  is  the  evidence  as  to  the  objects  for 
which  the  association  was  formed,  and  without  proof  of 
its  constitution  or  rules  respecting  admission  of  members 
and  the  management  of  its  affairs  it  was  held  to  be  a  com- 
mon partnership.  A  partnership  has  been  defined  to  be  a 
"combination  by  two  or  more  persons  of  capital,  or  labor, 
or  skill,  for  the  purpose  of  business  for  their  common  bene- 
fit." It  may  be  formed,  not  only  for  every  kind  of  com- 
mercial business,  but  for  manufacturing,  hunting,  and  the 
like,  as  well  as  for  carrying  on  the  business  of  professional 
men,  mechanics,  laborers,  and  almost  all  other  employ- 
ments. It  would  seem  that  there  must  be  a  community  of 
interest  for  business  purposes.  Hence,  voluntary  associa- 
tions or  clubs,  for  social  and  charitable  purposes,  and  the 
like,  are  not  proper  partnerships,  nor  have  their  members 
the  powers  and  responsibilities  of  partners:  Parsons  on 
Part.,  6,  36,  42. 

A  benevolent  and  social  society  has  rarely,  if  ever, 
been  considered  a  partnership.  In  Lloyd  v.  Loaring,  6 
Vesey,  773,  the  point  was  not  made,  but  Lord  Eldon  thought 
the  bill  would  lie  on  the  ground  of  joint  ownership  of  the 
personal  property  in  the  members  of  a  Masonic  lodge;  there 
was  no  intimation  that  they  were  partners.  Where  a  soci- 
ety of  Odd  Fellows,  an  association  of  persons  for  purposes 
of  mutual  benevolence,  erected  a  building,  wdiich  was  after- 
w^ards  sold  at  sheriff's  sale  in  satisfaction  of  mechanics' 
liens,  in  distribution  of  the  proceeds,  it  was  said  that,  as 
respects  third  persons,  the  members  were  partners,  and  that 
lien-creditors,  who  were  not  members,  were  entitled  to  pref- 
erence as  against  the  liens  of  members :  Babb  v.  Reed,  5 
Rawle,  151.  Had  the  members  been  called  joint-tenants  of 
the  real  estate,  the  same  principle  in  the  distribution  would 
have  applied.  In  Flemyng  v.  Hector,  2  M.  &  W.  172,  Lord 
Abinger  stated  the  difference  between  a  body  of  gentle- 
men forming  a  club  and  meeting  together  for  one  common 
object,  and  a  partnership  where  persons  engage  in  a  com- 
munity of  profit  and  loss,  and  each  partner  has  the  right 


ASH  V.  GUIE  273 

of  property  for  the  whole,  and  in  any  ordinary  transac- 
tions may  bind  the  partnership  by  a  credit.  He  held  that 
a  club  and  its  committee  must  stand  on  the  ground  of  prin- 
cipal and  agent,  and  that  the  authority  of  the  committee 
depends  on  the  constitution  of  the  club,  which  is  to  be  found 
in  its  own  rules.  After  noting  the  rules  of  the  club,  in  the 
case  before  him,  he  says :  "It  therefore  appears  that  the 
members  in  general  intended  to  provide  a  fund  for  the 
committee  to  call  upon.  I  cannot  infer  that  they  intended 
the  committee  to  deal  upon  credit,  and  unless  you  infer 
that  that  was  the  intention,  how  are  the  defendants  bound?" 
A  mutual  beneficial  society  partakes  more  of  the  character 
of  a  club  than  of  a  trading  association.  Every  partner  is 
agent  for  the  partnership,  and  as  concerns  himself  he  is  a 
principal,  and  he  may  bind  the  others  by  contract,  though 
it  be  against  an  agreement  between  himself  and  his  part- 
ners. A  joint  tenant  has  not  the  same  power,  by  virtue  of 
the  relation,  to  bind  his  co-tenant.  Thus,  one  of  several 
co-adventurers  in  a  mine,  has  not,  as  such,  any  authority 
to  pledge  the  credit  of  the  general  body  for  money  bor- 
rowed for  the  purposes  of  the  concern.  And  the  fact  of 
his  having  the  general  management  of  the  mine  makes  no 
difference,  in  the  absence  of  evidence  from  which  an  im- 
plied authority  for  that  purpose  can  be  inferred:  Ricketts 
V.  Bennett,  4  M.,  G.  &  S.  686,  (56  Eng.  C.  L.). 

Here  there  is  no  evidence  to  warrant  an  inference  that 
when  a  person  joined  the  lodge  he  bound  himself  as  a  part- 
,ner  in  the  business  of  purchasing  real  estate  and  erecting 
•buildings,   or  as  a  partner,   so  that  other  members  could 
'  borrow  money  on  his  credit.     The  proof  fails  to  show  that 
the  officers  or  a  committee,  or  any  number  of  the  members, 
had  a  right  to  contract  debts  for  the  building  of  a  temple, 
which  would  be  valid  against  every  member  from  the  mere 
fact  that  he  was  a  member  of  the  lodge.     But  those  who 
engaged  in  the  enterprise  are  liable  for  the  debts  they  con- 
tracted, and  all  are  included  in  such  liability  who  assented 
to  the  undertaking,  or  subsequently  ratified  it.     Those  who 


274         PARTNER'S  POWER  TO  BIND  COPARTNER 

participated  in  the  erection  of  the  building,  by  voting  for 
and  advising  it.  are  bound  the  same  as  the  committee  who 
had  it  in  charge.  And  so  with  reference  to  borrowing 
money.  A  member  who  subsequently  approved  the  erec- 
tion or  borrowing  could  be  held  on  the  ground  of  ratifica- 
tion of  the  agent's  acts.  We  are  of  opinion  that  it  was 
error  to  rule  that  all  the  members  were  liable  as  partners 
in  their  relation  to  third  persons  in  the  same  manner  as 
individuals  associated  for  the  purpose  of  carrying  on  a 
trade. 

This  unincorporated  association  had  a  seal  which  the 
officers  were  authorized  to  use  for  certain  purposes.  Some 
of  those  who  engaged  in  the  business  of  borrowing  money 
directed  it  to  be  affixed  to  the  certificate  of  indebtedness. 
All  who  did,  adopted  it  as  their  seal  for  the  specific  pur- 
pose. It  was  not  the  seal  of  a  corporation,  nor  intended 
as  such.  The  parties  borrowed  the  money  in  the  name  of 
the  lodge,  and  gave  the  certificate  in  same  name,  and  adopted 
a  common  seal.  They  cannot  repudiate  it  in  good  faith  to 
the  lender.  He  loaned  the  money  on  a  sealed  instrument, 
in  many  respects  better  than  a  simple  contract.  Those  who 
advised  affixing  the  seal  should  be  held  the  same  as  their 
officers,  who  signed  the  certificate.  Were  the  members 
partners,  without  evidence  of  agreement  between  them  that 
the  seal  should  be  affixed  to  contracts,  those  not  assenting 
to  its  use  in  that  way  would  not  be  bound  by  a  sealed  in- 
strument, though  given  for  a  debt  for  which  all  were  lia- 
ble. Schmertz  r.  Shreeve.  12  P.  F.  Smith  457.  The  learned 
judge  was  right  in  ruling  that  the  certificate  was  a  sealed 
instrument,  but  not,  under  the  evidence,  in  holding  that  it 
was  authorized  by  all  the  members. 

Judgment  reversed,  and  a  venire  facias  de  novo 
awarded. 


f 


BEECHER  V.  BUSH  275 


BEECHER  V.  BUSH. 
In  the  Supreme  Court  of  Michigan,  i88i.   ,- 

45  Michigan  Reports,  i88.' 

CooLEY,  J.  The  purpose  of  the  action  in  the  court 
below  was  to  charge  Beecher  as  partner  with  WilHams  for 
a  bill  of  supplies  purchased  for  the  Biddle  House  in  Detroit. 
The  facts  are  all  found  by  special  verdict,  and  are  few  and 
simple.  Beecher  was  owner  of  the  Biddle  House,  and  Wil- 
liams proposed  in  writing  to  "hire  the  use"  of  it  from  day 
to  day,  and  open  and  keep  it  as  a  hotel.  Beecher  accepted 
his  proposals  and  Williams  went  into  the  house  and  began 
business,  and  in  the  course  of  the  business  made  this  pur- 
chase. The  proposals  are  set  out  in  full  in  the  specia4 
verdict. 

The  question  is  whether  by  accepting  the  proposals 
Beecher  made  himself  a  partner  with  Williams  in  the  hotel 
business ;  and  this  is  to  be  determined  on  the  face  of  the 
writing  itself.  It  is  conceded  that  Beecher  was  never  held 
out  to  the  public  as  a  partner,  and  that  the  bill  of  supplies 
was  purchased  on  the  sole  credit  of  Williams  and  charged 
to  him  on  the  books  of  the  plaintiffs  below.  The  case, 
therefore,  is  in  no  way  embarrassed  by  any  questions  of 
estoppel,  for  Beecher  has  done  nothing  and  suffered  noth- 
ing to  be  done  which  can  preclude  him  from  standing  upon 
his  exact  legal  rights  as  the  contract  fixed  them. 

Nor  do  we  understand  it  to  be  claimed  that  the  parties 
intended  to  form  a  partnership  in  the  hotel  business,  or 
that  they  supposed  they  had  done  so,  or  that  either  has 
ever  claimed  as  against  the  other  the  rights  of  a  partner. 
It  is  perfectly  clear  that  many  things  which  are  commonly 
incident  to  a  partnership,   these   parties  meant   should  be 


'  The  Reporter's  note  of  the  argument  of  counsel  is  omitted. 


276  PARTNER'S  POWER  TO  BIND  COPARTNER 

wholly  excluded  from  their  arrangement.  Some  of  these 
were  of  primary  importance.  It  is  plain,  for  example,  that 
Beecher  did  not  understand  that  his  credit  was  to  be  in 
any  way  involved  in  the  business,  or  that  he  was  to  have 
any  interest  in  the  supplies  that  should  be  bought,  or  any 
privilege  to  decide  upon  them,  or  any  legal  control  whatever 
until  proceeds  were  to  be  divided,  or  any  liability  to  losses 
if  losses  were  suffered.  These  are  among  the  most  com- 
mon incidents  to  a  partnership;  and  while  some  of  them, 
and  possibly  all  of  them,  may  not  be  necessary  incidents,  yet 
the  absence  of  all  is  very  conclusive  that  the  parties  had  no 
purpose  whatever  to  form  a  partnership,  or  to  give  to  each 
other  the  rights  and  powers,  and  subject  each  other  to  the 
obligations  of  partners.  In  general  this  should  be  conclusive. 
If  parties  intend  no  partnership  the  courts  should  give  effect 
to  their  intent,  unless  somebody  has  been  deceived  by  their 
acting  or  assuming  to  act  as  partners;  and  any  such  case 
must  stand  upon  its  peculiar  facts,  and  upon  special  equities. 

It  is  nevertheless  possible  for  parties  to  intend  no  part- 
nership and  yet  to  form  one.  If  they  agree  upon  an  arrange- 
ment which  is  a  partnership  in  fact,  it  is  of  no  importance 
that  they  call  it  something  else,  or  that  they  even  expressly 
declare  tliat  they  are  not  to  be  partners.  The  law  must  de- 
clare what  is  the  legal  import  of  their  agreements,  and  names 
go  for  nothing  when  the  substance  of  the  arrangement 
shows  them  to  be  inapplicable.  But  every  doubtful  case 
must  be  solved  in  favor  of  their  intent ;  otherwise  we  should 
"carry  the  doctrine  of  constructive  partnership  so  far  as  to 
render  it  a  trap  to  the  unwary."  Kent,  C.  J.,  in  Post  v. 
Kimhcrly  9  Johns.  470,  504. 

We  have  then  a  case  in  which  the  party  it  is 
sought  to  charge  has  not  held  himself  out,  or  suffered  him- 
self to  be  held  out  as  a  partner  either  to  the  public  at  large 
or  to  the  plaintiff,  and  has  not  intended  to  form  that  rela- 
tion. He  is  not  therefore  a  partner  by  estoppel  nor  by 
intent;  and  if  he  is  one  at  all,  it  must  be  by  construction  of 
law. 


BEECHER  r.  BUSH  277 

What  then  are  the  indicia  of  partnership  in  this  case; 
the  marks  which  force  that  construction  upon  the  court 
irrespective  of  the  intent  of  the  parties;  that  in  fact  control 
their  intent,  and  give  to  the  parties  bringing  suit  rights 
which  they  were  not  aware  of  when  they  sold  the  supplies  ? 

In  the  elaborate  and  able  brief  which  has  been  pre- 
sented in  behalf  of  the  defendants  in  error  it  is  conceded 
that  the  fact  that  Beecher  was  to  receive  each  day  a  sum 
"equal  to  one-third  of  the  gross  receipts  and  gross  earn- 
ings" for  the  day,  would  not  necessarily  make  him  a  partner. 
\\'hat  is  claimed  is  that  the  fact  is  "cogent  evidence"  that 
Beecher  was  to  participate  in  the  results  of  the  business 
in  a  manner  that  indicated  he  was  a  principal  in  it,  and  was 
not  receiving  compensation  for  the  use  of  property  merely. 
The  view  of  the  law  here  suggested  is  undoubtedly  correct. 
There  may  be  a  participation  in  the  gross  returns  that  would 
make  the  receiver  a  partner,  and  there  may  be  one  that 
would  not.  The  question  is  in  what  capacity  is  participation 
had.  Gross  returns  are  not  profits  and  may  be  large  when 
there  are  no  profits,  but  it  cannot  be  predicated  of  either 
gross  returns  or  profits  that  the  right  to  participate  is  con- 
clusive evidence  of  partnership.  This  is  settled  law  both 
in  England  and  in  this  country  at  this  tim.e,  as  is  fully  shown 
by  the  authorities  cited  for  the  defendants  in  error.  It 
was  recognized  in  Hinuian  v.  LittcU  23  Mich.  484;  and  in 
New  York,  where  the  doctrine  that  participation  in  profits 
proves  partnership  has  been  adhered  to  most  closely,  it 
is  admitted  there  are  exceptions.  Eager  v.  Crazvford  "6 
N.  Y.  97. 

But  we  quite  agree  with  counsel  for  defendants  in 
error  that  no  case  ought  to  turn  upon  the  unimportant  and 
mere  verbal  distinction  between  the  statement  in  the  papers 
that  Beecher  was  to  have  a  sum  "equal  to"  one-third  of 
the  gross  receipts  and  gross  earnings,  and  a  statement  that 
he  was  to  have  one-third  of  these  receipts  and  earnings. 
It  is  perfectly  manifest  it  was  intended  he  should  have 
one-third  of  them ;  that  they  should  be  apportioned  to  him 


278  PARTNER'S  POWER  TO  BIND  COPARTNER 

regularly  and  daily,  and  not  that  Williams  was  to  appro- 
priate the  whole  and  pay  a  sum  "equal  to"  Beecher's  pro- 
portion when  it  should  be  convenient.  We  can  conceive  of 
cases  where  the  difference  in  phraseology  might  be  import- 
ant, because  it  might  give  some  insight  into  the  real  intent 
and  purpose  of  the  parties,  and  throw  light  upon  the  ques- 
tion whether  that  which  was  to  be  received,  was  to  be  re- 
ceived as  partner  or  only  by  way  of  compensation  for  some- 
thing supplied  to  the  other,  but  the  intent  in  this  case  is  too 
manifest  to  be  put  aside  by  any  mere  ingenuity  in  the  use  of 
words.     Loomis  v.  Marshall  12  Conn.  69,  79. 

In  Cox  V.  Hickman  8  H.  L.  Cas.  268,  306,  Lord  Cran- 
worth  stated  very  clearly  his  views  of  what  should  be  the 
test  of  partnership.     *     *     * 

It  is  said,  and  we  believe  justly,  in  Bullcn  v.  Sharp 
L.  R.  I  C.  B.  86,  that  the  decision  in  Cox  v.  Hickman 
brought  back  the  law  of  England  to  what  it  should  be,  and 
Mr.  Baron  Bramwell,  referring  to  what  was  declared  to 
be  law  in  Waugh  v.  Carver  2  H.  Bl.  235,  expressed  the  hope 
"that  this  notion  is  overruled,"  adding  that  it  is  "one  which 
I  believe  has  caused  more  injustice  and  mischief  than  any 
bad  law  in  our  books."  p.  128.  It  is  certainly  overruled 
very  conclusively  in  Great  Britain.  Kilshazv  v.  Jukes  3  B. 
&  S.  847;  Shazv  V.  Ganlt  16  Irish  C.  L.  R.  357;  Holme  v. 
Hammond,  L.  R.  7  Exch.  218;  Ex  parte  Delhasse  7  Ch.  Div. 
511.  And  though  in  New  York  the  courts,  hampered  some- 
what by  early  cases,  have  not  felt  themselves  at  liberty  to 
adopt  and  follow  the  decision  in  Cox  v.  Hickman  to  the  full 
extent,  it  would  be  easy  to  show  that  the  American  authori- 
ties in  the  main  are  in  harmony  with  it.  Indeed  that  is 
very  well  shown  in  Eastman  v.  Clark  53  N.  H.  276,  where 
the  authorities  are  collated.  It  must  be  admitted,  however, 
that  the  attempts  at  an  application  of  the  test  to  the  com- 
plicated facts  of  particular  cases  have  not  been  productive 
of  harmonious  results.  A  few  cases  may  be  mentioned 
which  in  their  facts  have  a  resemblance,  more  or  less  strong, 
to  the  one  before  us. 


I 


BEECHER  z:   BUSH  279 

Champion  t'.  Bostzvick  i8  Wend.  175,  was  a  case 
where  parties  who  were  severally  owners  of  horses  and 
stages  on  different  parts  of  one  stage  Hne  made  an  arrange- 
ment that  the  fares  received  by  both  should  be  divided  be- 
tween them  in  proportions  agreed  upon.  This  was  held 
to  constitute  them  partners,  so  that  a  third  person  injQred 
by  the  carelessness  of  a  driver  employed  by  one  might  bring 
suit  for  the  negligence  of  all.  But  in  the  somewhat  similar 
case  of  Easfnwii  z'.  Clark  53  N.  H.  276,  the  conclusion  of 
partnership  or  no  partnership,  it  was  said,  must  be  drawn 
as  one  of  fact.  "The  real  and  ultimate  question,"  says 
Smith,  J.  (p.  289),  "in  all  cases  like  the  present,  is  one  of 
agency.  Did  the  person  sought  to  be  charged  stand  in  the 
relation  of  principal  to  the  person  contracting  the  debt? 
Participation  in  the  profits  is  not  decisive  of  that  question, 
'except  so  far  as  it  is  evidence  of  the  relation  of  principal 
and  agent  between  the  persons  taking  the  profits  and  those 
actually  carrying  on  the  business.'  Whether  such  relation 
existed  is  a  question  of  fact.  *  *  *  There  is  no  sound 
foundation  for  an  arbitrary  rule  of  law  requiring  courts  or 
juries  to  regard  participation  in  the  profits  as  a  decisive 
test  which  will  in  all  instances  necessitate  the  conclusion 
that  the  participator  is  liable  for  the  debts." 

In  Fanners'  Ins.  Co.  v.  Ross,  29  Ohio  St.  429,  it  ap- 
peared that  by  arrangement  one  party  furnished  the  ground 
and  the  material  for  making  brick,  and  also  the  fuel,  and  an- 
other was  at  the  expense  of  burning  the  brick.  The  brick 
were  then  to  be  divided,  the  former  receiving  one-fourth  and 
the  latter  three-fourths,  and  the  latter  was  also  to  pay  the 
former  ten  dollars  on  each  one  hundred  thousand  bricks. 
This  was  held  to  create  a  partnership,  and  Musicr  z'.  Trump- 
hour  5  Wend.  274,  and  Evcritt  v.  Chapman  6  Conn.  347, 
were  relied  upon  as  authority. 

The  New  York  cases  might  support  this  decision,  but 
the  case  of  Loomis  v.  Marshall  12  Conn.  69,  can  hardly  be 
considered  in  accord  with  it.  The  facts  were  these :  B.  had 
a  cloth  factory.    A.  agreed  with  him  to  furnish  a  full  supply 


280  PARTNER'S  POWER  TO  BIND  COPARTNER 

of  wool  for  two  years.  B.  to  devote  the  factory  for  two 
years  exclusively  to  manufacturing,  and  the  net  proceeds, 
after  deducting  the  incidental  expenses  and  costs  of  sale, 
were  to  be  divided  in  the  proportion  of  55  per  centum  to 
A.  and  45  per  centum  to  B.,  and  the  cost  of  manufacture 
was  to  be  shared  in  like  proportion.  This  was  held  no  part- 
nership. Says  Huntington.  J. :  "This  community  of  profit 
is  the  test  to  determine  whether  the  contract  be  one  of  part- 
nership ;  and  to  constitute  it,  a  partner  must  not  only  share  in 
the  profits,  but  share  in  them  as  a  principal ;  for  the  rule  is 
now  well  established  that  a  party  who  stipulates  to  receive 
a  sum  of  money  in  proportion  to  a  given  quantum  of  the 
profits,  as  a  reward  for  his  labor,  is  not  chargeable  as  a 
partner."  And  of  the  share  set  off  to  B.  he  says  it  "is  not 
expressed  in  terms  to  be  for  such  compensation ;  but  this  is 
its  legal  meaning."  pp.  yj,  79.  Moore  i\  Smith  19  Ala.  774; 
Bowman  v.  Bailey  10  Vt.  170,  and  Price  z'.  Alexander  2 
Greene  (la.)  427,  may  be  referred  to  for  similar  views. 

Not  dissimilar  to  Dunham  v.  Rogers  -  is  the  case  of 
Denny  v.  Cahot  6  Met.  82.  which  was  also  a  case  in  which 
one  party  supplied  the  raw  material  and  another  manu- 
factured it,  and  was  to  receive  one-third  part  of  the  net 
profits.  This  proportion,  it  was  found,  was  to  be  re- 
ceived by  the  manufacturer  only  as  a  compensation  for 
his  labor  and  services ;  and  it  was  held  perfectly  com- 
petent to  provide  for  making  compensation  by  such  a 
standard  without  constituting  a  partnership.  Perrine  v. 
Hankinson  11  N.  J.  181,  is  relied  upon  as  authority, 
among  other  cases.  The  same  doctrine  was  reiterated  in 
Holmes  v.  Old  Colony  R.  R.  Co.  5  Gray  58;  Bradley  v. 
White  10  Met.  303 ;  and  by  Day,  J.,  in  a  careful  opinion  in 
Harvey  v.  Childs  28  Ohio  St.  319,  already  referred  to. 

It  is  needless  to  cite  other  cases.  They  cannot  all  be 
reconciled,  1)ut  enough  are  cited  to  show  that  in  so  far  as 


I 
I 


^The  quotation   from  the  opinion  in   Dunham  v.  Rogers,  supra,  is 
omitted. 


I 


BEECHER  V.  BUSH  281 

the  notion  ever  took  hold  of  the  judicial  mind  that  the 
question  of  partnership  or  no  partnership  was  to  be  settled 
by  arbitrary  tests  it  was  erroneous  and  mischievous,  and 
tlie  proper  corrective  has  been  applied.  Except  when  one 
allows  the  public  or  individual  dealers  to  be  deceived  by 
the  appearances  of  partnership  when  none  exists,  he  is  ne\=^r 
to  be  charged  as  a  partner  unless  by  contract  and  with  in- 
tent he  has  formed  a  relation  in  which  the  elements  of 
partnership  are  to  be  found.  And  what  are  these?  At 
the  very  least  the  following:  Community  of  interest  in 
some  lawful  commerce  or  business,  for  the  conduct  of  which 
the  parties  are  mutually  principals  of  and  agents  for  each 
other,  with  general  powers  within  the  scope  of  the  busi- 
ness, which  powers  however  by  agreement  between  the  par- 
ties themselves  may  be  restricted  at  option,  to  the  extent 
even  of  making  one  the  sole  agent  of  the  others  and  of  the 
business. 

In  this  case  we  have  the  lawful  commerce  or  business, 
namely,  the  keeping  of  the  hotel.  We  have  also  in  some 
sense  a  community  of  interest  in  the  proceeds  of  the  busi- 
ness, though  these  are  so  divided  that  all  the  profits  and 
all  the  losses  are  to  be  received  and  borne  by  one  only.  But 
where  in  the  mutual  arrangement  does  it  appear  that  either 
of  the  parties  clothed  the  other  with  an  agency  to  act  on  his 
behalf  in  this  business?  We  speak  now  of  intent  merely, 
and  not  of  any  arbitrary  implication  of  intent  which  the 
law,  according  to  some  authorities,  may  raise  irrespective 
of  and  perhaps  contrary  to  the  intent.  Could  Beecher  buy 
for  the  business  a  dollar's  worth  of  provisions?  Could  he 
hire  a  porter  or  a  waiter  ?  Could  he  discharge  one  ?  Could 
he  say  the  house  shall  be  kept  for  fastidious  guests  ex- 
clusively and  charges  made  in  proportion  to  what  they  de- 
mand, or  on  the  other  hand  that  the  tables  shall  be  plain 
and  cheap  so  as  to  attract  a  greater  number?  Could  he 
persist  in  lighting  with  gas  if  Williams  chose  something- 
different,  or  reject  oil  if  Williams  saw  fit  to  use  it?  Was 
a  servant  in  the  house  at  his  beck  or  disposal,  or  could  he 


282  PARTNER'S  POWER  TO  BIND  COPARTNER 

turn  off  a  guest  that  Williams  saw  fit  to  receive,  or  receive 
one  that  Williams  rejected  as  unfit?  In  short,  what  one 
act  might  he  do  or  authority  exercise,  which  properly  per- 
tains to  the  business  of  keeping  hotel,  except  merely  the 
supervision  of  accounts,  and  this  for  the  purpose  of  ac- 
counting only?  And  how  could  he  be  principal  in  a  busi- 
ness over  which  he  had  absolutely  no  control?  Nor  must 
we  forget  that  this  is  not  a  case  in  which  powers  which 
might  otherwise  be  supposed  to  exist  are  taken  away  or 
excluded  by  express  stipulation;  but  they  are  powers  which 
it  is  plain  from  their  contract  the  parties  did  not  suppose 
would  exist,  and  therefore  have  not  deemed  it  necessary  to 
exclude. 

On  the  other  hand  what  single  act  are  we  warranted 
in  inferring  the  parties  understood  Williams  was  to  do  for, 
and  as  the  agent  of,  Beecher?  Not  to  furnish  supplies 
surely,  for  these  it  was  expressly  agreed  should  be  fur- 
nished by  Williams  and  paid  for  daily.  Not  to  contract 
debts  for  water  and  gas  bills  and  other  running  expenses, 
for  by  the  agreement  there  were  to  be  no  such  debts.  Nor 
was  this  an  agreement  merely  that  expenses  incurred  for 
both  were  to  be  met  without  the  use  of  credit,  but  it  was 
expressly  provided  that  they  were  to  be  the  expenses  of 
one  party  only,  and  to  be  met  by  him  from  his  own  means. 
There  was  to  be  no  employment  of  credit,  but  it  was  the 
credit  of  Williams  alone  that  was  in  the  minds  of  the 
parties. 

It  is  difficult  to  understand  how  the  element  of  agency 
could  be  more  perfectly  eliminated  from  their  arrange- 
ments than  it  actually  was.  Beecher  furnished  the  use  of 
the  hotel  and  a  clerk  to  supervise  the  accounts,  and  received 
for  so  doing  one-third  the  gross  returns.  It  was  not  under- 
stood that  he  was  to  intermeddle  in  any  way  with  the  con- 
duct of  the  business  so  long  as  Williams  adhered  to  the 
terms  of  his  contract.  If  the  business  was  managed  badly 
Beecher  might  be  a  loser,  but  how  could  he  help  himself? 
He  had  reserved  no  right  to  correct  the  mistakes  of  Wil- 


I 


BEECHER  V.  BUSH  283 

liams,  supply  his  deficiencies  or  overrule  his  judgments.  He 
did  indeed  agree  to  take  and  account  for  whatever  furni- 
ture should  be  brought  into  the  house  by  Williams,  but  the 
bringing  any  in  was  voluntary,  and  so  far  was  Beecher  from 
undertaking  to  pay  to  the  sellers  the  purchase  price,  that 
on  the  contrary  the  value  was  to  be  ofifset  against  the  de- 
terioration of  that  which  Beecher  supplied;  and  it  was  quite 
possible  that,  as  between  himself  and  Williams,  there  might 
be  nothing  to  pay.  And  while  Williams  was  not  compella- 
ble to  put  any  in,  Beecher,  on  the  other  hand,  had  no  au- 
thority to  put  any  in  at  the  cost  of  Williams. 

It  is  plain,  therefore,  that  if  there  is  any  agency  in  this 
case  for  Beecher  to  act  for  Williams,  or  Williams  to  act  for 
Beecher,  it  is  an  agency  implied  by  law,  not  only  without 
having  expressed  a  purpose  that  an  agency  shall  exist,  but 
in  spite  of  their  plain  intent  that  none  shall  exist.  If  there- 
fore we  shall  say  that  agency  of  each  to  act  for  the  other, 
or  agency  of  one  to  act  for  both  in  the  common  business, 
is  to  be  the  test  of  partnership,  or  to  be  one  of  the  tests, 
but  that  the  law  may  imply  the  agency  irrespective  of  the 
intent,  and  then  imply  the  partnership  from  the  agency,  we 
see  at  once  that  the  test  disappears  from  all  our  calcula- 
tions. To  imply  something  in  order  that  that  something 
may  be  the  foundation  whereupon  to  erect  an  implication 
of  something  else  is  a  mere  absurdity.  The  test  of  part- 
nership must  be  found  in  the  intent  of  the  parties  them- 
selves. They  may  say  they  intend  none  when  their  con- 
tract plainly  shows  the  contrary ;  and  in  that  case  the  in- 
tent shall  control  the  contradictory  assertion;  but  here  the 
intent  is  plain. 

We  have  not  overlooked  any  one  of  the  circumstances 
which  on  the  argument  were  pointed  out  as  peculiar  to  this 
case.  None  of  them  is  inconsistent  with  the  intent  tliat 
Beecher  was  to  be  paid  for  the  use  of  his  building  and  fur- 
niture merely.  He  retained  possession;  but  a  reason  for 
this  appears  in  the  power  he  reserved  to  terminate  the  ar- 
rangement whenever  the  contract  was  broken  by  Williams. 


284  PARTNER'S  POWER  TO  BIND  COPARTNER 

Being  in  possession  he  might  suppose  he  could  eject  Wil- 
hams  without  suit.  He  might  also  think  it  important  to 
the  reputation  of  the  hotel  that  no  landlord  should  be  in 
debt  for  supplies  or  for  servants'  wages ;  and  for  that  rea- 
son require  cash  payments.  It  is  easy  to  see  that  as  lessor 
he  might  have  had  an  interest  in  all  the  stipulations  to 
which  Williams'  assent  was  required. 

There  is  another  view  of  this  case  that  seems  to  us 
conclusive.  It  is  urged  on  behalf  of  defendants  in  error 
that  Beecher  was  a  dormant  partner.  Now  a  dormant  part- 
ner is  a  secret  partner;  one  who  becomes  such  by  a  secret 
arrangement,  while  his  associate  is  held  out  to  the  world  as 
sole  proprietor  and  manager  of  the  business.  Was  this 
the  case  here  ?  Nothing  in  the  record  indicates  it.  Beecher 
was  in  possession  of  the  hotel,  and  we  must  suppose  had 
his  clerk  there.  These  were  facts  open  and  patent  to  the 
whole  world  who  had  occasion  to  go  there  or  to  deal  with 
Williams.  They  naturally  suggested  the  inquiry  what  was 
the  arrangement  between  the  parties ;  and  there  is  nothing 
in  the  case  to  indicate  that  plaintiff  in  error  would  not  have 
learned  all  the  details  of  the  arrangement  had  they  made 
the  necessary  inquiries.  There  is  no  indication  anywhere 
of  intended  secrecy.  If,  therefore,  there  was  any  partner- 
ship at  all,  it  existed  because  the  contract  and  the  open  and 
public  conduct  of  business  under  it  created  one,  and  the 
right  of  the  defendants  in  error  to  recover  must  depend 
upon  whether  they  had  a  right,  with  the  contract  before 
them,  to  understand  that  they  were  furnishing  supplies  on 
the  credit  of  Beecher?  Would  they  have  had  this  right? 
If  so,  no  interference  of  Beecher,  and  no  notice  to  them 
not  to  sell  to  Williams  relying  on  Beecher's  credit,  would 
have  been  of  the  least  avail.  If  he  had  said  to  them,  "Gen- 
tlemen, by  our  contract  Mr.  Williams  furnishes  all  the  sup- 
plies; I  do  not  and  cannot  control  in  respect  to  quality, 
quantity  or  cost;  he  alone,  by  our  understanding,  is  to  pay 
for  them,  and  I  forbid  you  to  sell  on  my  credit;"  it  would 
all  have  been  useless.     On  their  view  of  the  case  he  was 


I 


BEECHER  V.  BUSH  285 

bound  by  an  iron  rule  of  the  law,  from  which  it  would 
have  been  impossible  to  rescue  his  credit  until  the  arrange- 
ment with  Williams  should  in  some  manner  be  terminated. 
And  this  would  have  been  the  case  also  even  if  the  arrange- 
ment with  Williams  had  been  a  secret  one,  and  Beecher 
had  attempted  to  protect  himself  by  disclosing  its  terms. 
This  is  as  much  as  to  say  that  parties  are  not  at  liberty  to 
contract  as  they  please,  even  when  they  propose  nothing 
wrong  and  do  nothing  unfair  to  any  one.  But  we  cannot 
bring  our  minds  to  this  result. 

Our  conclusion  is  that  Beecher  and  Williams,  having 
never  intended  to  constitute  a  partnership,  are  not  as  be- 
tween themselves  partners.  There  was  to  be  no  common 
property,  no  agency  of  either  to  act  for  the  other  or  for 
both,  no  participation  in  profits,  no  sharing  of  losses.  If 
either  had  failed  to  perform  his  part  of  the  agreement,  the 
remedy  of  the  other  would  have  been  a  suit  at  law,  and  not 
a  bill  for  an  accounting  in  equity.  If  either  had  died,  the 
obligations  he  had  assumed  would  have  continued  against 
his  representatives.  We  also  think  there  can  be  no  such 
thing  as  a  partnership  as  to  third  persons  when  as  between 
the  parties  themselves  there  is  no  partnership  and  the  third 
persons  have  not  been  misled  by  concealment  of  facts  or 
by  deceptive  appearances. 

The  judgment  must  be  reversed  wuth  costs  and  a  new 
trial  ordered. 

The  other  Justices  concurred.^ 


'^Compare:  Smith  v.  Knight,  ~i  111.  148,  1873.  (A  was  a  commission 
merchant,  who  apparently  sold  on  time,  and  cashed  the  sales  for  his 
principals.  To  obtain  the  money  necessary  to  carry  on  the  business  in 
this  way,  he  made  an  agreement  with  B,  by  which  B  lent  A  the  money 
he  should  need  up  to  a  certain  sum,  and  A  paid  B  10  per  cent,  interest 
on  the  average  balance  advanced,  and  one-half  his,  A's,  commissions 
after  B  had  deducted  a  certain  sum  for  office  expenses.  A  also  assigned 
his  "books,  accounts,  drafts  or  claims"  which  he  had  or  would  have  for 
advances  on  sales  or  commissions  to  B,  B  having  authority  to  collect  or 
compromise  the  same;  out  of  the  proceeds  B  paid  himself  the  cost  of 
collection  and  his,  B's,  share  of  the  commissions  and  gave  the  overplus 
to  A.  Held,  that  this  agreement  did  not  make  B  a  partner  of  A  as  to 
third  persons.) 

Harvey  v.  Childs,  28  O.  St.  319,  1876.     (A  ordered  hogs,  but  had  not 


286  PARTNER'S  POWER  TO  BIND  COPARTNER 

the  money  to  pay  for  them.  A  agreed  with  B,  that  B  would  loan  A  the 
money,  B  to  have  possession  of  the  hogs,  as  security,  sell  and  retain  half 
the  profits.  If  there  was  any  loss,  A  would  repay.  Held,  A  and  B  were 
not  partners ;  that  A  was  a  mere  lender  and  bailee,  and  that  D,  who  sold 
the  hogs  to  B,  could  not  recover  the  price  from  B.)  Accord:  Johnson 
V.  Miller,  i6  O.  431,  1847. 

Kellogg  Neivspaper  Co.  v.  Farrcll,  88  Mo.  594,  1886.  (A,  an  owner  of 
a  newspaper,  leased  it  to  B,  who  was  to  run  the  paper  "as  if  owner," 
pay  all  expenses  and  divide  half  the  net  profits.  A  was  allowed  to  sell 
half  the  business,  and  in  such  case  he.  A,  was  to  lease  the  other  half  to 
B.  A  reserved  the  right  to  control  the  "general  and  political  policy  of 
the  paper."  C,  who  supplied  B  with  materials  used  in  conducting  the 
paper,  sued  A  as  partner.  The  trial  Judge  refused  to  instruct  the  jury 
that  the  agreement  made  A  and  B  partners  as  to  third  persons.  Judg- 
ment for  the  defendant  affirmed,  the  Appellate  Court  declaring  that  the 
trial  Judge  "would  have  been  justified  in  instructing  the  jury  that  the 
plaintiff  could  not  recover.") 

Meehan  v.  P'alentine,  145  U.  S.  611,  1892.  (C  sued  A  as  B's  partner. 
He  proved  an  agreement  between  A  and  B  in  which  A  agreed  to  loan 
B  $10,000.  and  B  agreed  to  pay  A  interest  and  one-tenth  of  the  profits 
over  $10,000;  that  the  agreement  was  for  one  year;  that  A  had  loaned 
the  money  and  that  the  agreement  was  renewed  from  year  to  year.  A 
obtained  a  non-suit.     Judgment  affirmed.) 

Thillman  v.  Benton.  82  Md.  64,  1895.  (A  agreed  to  lend,  and  did 
lend,  $2,000  to  B  and  C  for  their  business ;  B  to  act  as  manager  of  the 
business  and  draw  out  $15  per  week.  At  the  end  of  the  year  B  and  C 
were  to  pay  A  $2,000  and  an  amount  equal  to  one-third  of  the  profits. 
Held,  that  the  agreement  did  not  make  A  a  partner  of  B  and  C.) 

Bradley  v.  Ely,  24  Ind.  App.  2,  1900.  (A.  an  owner  of  a  farm,  leased 
it  to  B,  B  agreeing  to  pay  for  one-third  of  the  personalty  on  the  farm. 
At  the  end  of  the  association  the  personalty  was  to  be  sold.  B  was  to 
manage  the  farm  and  to  plant  such  crops  and  sell  at  such  price  as  A  and 
B  should  mutually  agree  upon-  two-thirds  of  the  profits  to  go  to  A  and 
one-third  to  B.  B  executed  a  note  to  C  for  money  to  pay  off  an  indebt- 
edness incurred  in  running  the  farm.  C  sued  A  and  B  as  partners. 
Judgment  for  C.  A's  motion  for  a  new  trial,  on  the  groound  that  the 
agreement  was  not  sufficient  evidence  of  partnership  to  go  to  the  jury, 
granted  on  appeal.) 

Estabrook  v.  Woods,  192  Mass.  499.  1906.  (Under  an  agreement 
between  A  and  B,  A  gave  B  $200  and  procured  for  B  a  stock  of  cigars. 
B  was  to  return  the  money  and  price  of  the  goods  at  all  events.  B  also 
gave  A  a  chattel  mortgage  on  all  the  goods  in  his,  B's,  cigar  store,  agreed 
to  devote  his  time  to  the  store,  ?nd  from  the  proceeds  to  pay,  first,  the 
expenses ;  second,  interest  due  A  ;  third,  $20  per  week  for  his,  B's,  own 
use;  fourth,  one-half  of  the  balance  to  A.  A  was  sued  as  a  partner  of 
B.    Judgment  for  plaintiff  reversed  on  appeal.) 

It  is  suggested  that  the  student  discuss  in  connection  with  the  fore- 
going cases  the  following: 

State  National  Bank  of  Springfield  v.  Butler,  149  111.  573,  1894.  (A 
owned  and  operated  a  mine.  A  sold  a  one- fourth  interest  in  the  mine 
to  B  for  $13,000,  A  reserving  the  right  to  a  royalty  on  all  coal  mined; 
the  right  to  control  the  operation  of  the  mine,  and  agreed  to  account  to 
B  each  month  for  one-fourth  of  the  profits.  Held,  that  the  agreement 
made  A  and  B  partners  as  to  third  persons  in  the  operation  of  the  mine.) 

Merrall  v.  Dobbins.  169  Pa.  480,  1895.  (The  parties  submitted  the 
following  "case  stated"  to  the  Court:  By  an  agreement  in  writing,  D 
leased  a  hotel  with  all  the  personal  property  on  the  premises  for  three 
months  to  G  for  $20,000.  payable  in  four  equal  installments.  D  was  rot 
to  be  liable  for  the  business  done,  or  for  the  debts  contracted  by  G. 
The  a'-Tcement  designated  by  the  parties  as  a  lease  further  provided 


BEECHER  V.  BUSH  287 

(i)  that  G  shall  give  his  undivided  attention  and  devote  his  best  energies 
to  the  promotion  of  the  business  to  be  done  on  the  said  premises ;  (2) 
that  D  or  his  representatives  shall  have  the  right  of  free  access  to  the 
premises  at  all  times;  (3)  that  in  addition  to  the  sum  of  $20,000  D  shall 
have  80  per  cent,  of  the  net  profits  derived  from  all  of  the  business 
done  on  the  premises ;  (4)  that  in  addition  to  the  current  expenses  of 
the  hotel  and  the  business  done  therein  there  shall  be  charged  to  the 
expense  account  the  cost  of  insurance,  water  and  :ewer  rents,  license 
fee.  interior  repairs,  and  the  salary  of  a  person  to  be  designated  by  D, 
who  shall  keep  the  books  and  act  as  cashier,  receive  all  money,  deposit 
it  in  his  own  name,  and  make  all  payments;  (5)  that  at  the  termination 
of  the  agreement  a  statement  shall  be  made  of  the  business  done,  and 
that  G_  shall  receive  20  per  cent,  of  the  net  profits;  (6)  that  at  the 
expiration  of  the  lease  D  shall  pay  to  G  $1,000,  and  that  D  shall  have 
the  right  at  any  time  upon  twenty-four  hours'  notice  to  annul  the  agree- 
ment and  assume  sole  and  exclusive  possession  of  the  property;  (7) 
that  G  shall  have  absolute  control  and  management  of  the  business 
during  the  continuance  of  the  agreement,  and  assent  to  a  transfer  of  the 
license  if  the  agreement  shall  be  annulled.  Held,  that  the  agreement 
constituted  a  partnership  between  D  and  G.  as  to  third  parties,  and  that 
D  was  liable  for  debts  contracted  by  G  in  the  conduct  of  the  business.) 


288  PARTNER'S  POWER  TO  BIND  COPARTNER 


HACKETT  V.  STANLEY. 
In  the  Court  of  Appeals  of  New  York,  1889. 

115  New  York  Appeal;  Reports,  625. 

Appeal  by  defendant  Stanley  from  a  judgment  of  the 
General  Term  of  the  Court  of  Common  Pleas  of  the  city 
and  county  of  New  York,  entered  upon  an  order  made 
April  4,  1887,  which  affirmed  a  judgment  of  the  General 
Term  of  the  City  Court  affirming  a  judgment  in  favor  of 
plaintiffs,  entered  upon  a  decision  of  the  court  on  trial  with- 
out a  jury. 

This  action  was  brought  against  defendants,  as  al- 
leged copartners,  for  materials  and  labor  in  fitting  up  the 
premises  used  in  the  firm  business. 

The  facts,  so  far  as  material,  are  stated  in  the  opinion.^ 

Ruger,  Ch.  J.  The  determination  of  this  case  involves 
the  construction  of  an  agreement  between  James  Stanley 
and  Moulton  W.  Gorham,  and  the  question  whether  such 
agreement  constituted  the  defendant  Stanley  a  partner  as 
to  third  persons  with  Gorham.  If  it  did,  then  the  judg- 
ment must  be  sustained. 

The  liability  of  the  alleged  partners  is  predicated  upon 
a  debt  for  services  rendered  and  materials  furnished  by 
the  plaintiffs,  upon  the  request  of  Gorham,  in  fitting  up  a 
place  in  New  York  to  carry  on  the  business  of  heating, 
ventilating,  etc. 

The  part  of  the  agreement  which,  it  is  claimed,  cre- 
ates the  partnership,  reads  as  follows :  "That  for  and  in 
consideration  of  the  loan  of  seven  hundred  and  fifty  ($750) 
dollars  from  the  said  party  of  the  second  part  to  the  said 


^  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


HACKETT  V.  STANLEY  289 

party  of  the  first  part,  for  use  in  the  business  of  heating, 
ventilating,  etc.,  for  which  said  party  of  the  first  part  has 
given  unto  said  party  of  the  second  part  his  note  at  two 
years,  with  interest,  bearing  date  of  January  14,  1885,  pay- 
ment of  which  is  secured  by  an  assignment  of  said  value  in 
a  certain  $3,000  policy  in  the  Massachusetts  Mutual  Life 
Insurance  Company,  and  also  by  a  certain  chattel  mort- 
gage, bearing  date  January  27,,  1885,  and  in  further  con^ 
sidcration  of  services  of  said  party  of  second  part  in  secur- 
ing sales  in  said  husiness  and  for  any  further  moneys  he 
max,  at  his  ozvn  option,  advance  for  use  in  said  husiness, 
the  said  party  of  the  first  part  agrees  to  divide  equally  the 
yearly  net  profits  of  said  business.  It  is  understood  and 
agreed  that  said  loan  of  seven  hundred  and  fifty  dollars  is 
expressly  for  use  in  said  business  and  for  no  other  use 
whatever."  It  was  further  provided  that  advances  made 
by  either  party  in  the  business  were  at  all  times  subject  to 
be  withdrawn  at  the  option  of  the  party  making  them,  and 
were  to  bear  interest  while  used  in  the  business.  Gorham 
was  to  be  allowed  $1,000  per  annum  for  his  services  in 
managing  the  business,  and  quarterly  statements  of  its  con- 
dition were  to  be  made  by  him  to  Stanley. 

It  is  fairly  to  be  implied  from  the  contract  that  Gor- 
ham was  to  be  the  active  man  in  the  business,  and  it  was 
to  be  carried  on  in  his  name;  but  whether  he  was  to  fur- 
nish any  capital,  and  if  so,  how  much,  is  not  disclosed. 
For  aught  that  appears  the  money  furnished  by  Stanley 
was  all  that  was  supposed  to  be  necessary,  to  start  and 
carry  on  the  business  until  returns  were  realized  from  its 
prosecution. 

This  agreement  does  not,  in  express  terms,  purport  to 
form  a  partnership ;  neither  is  the  intention  to  do  so  dis- 
claimed, and  the  question  is,  therefore,  whether,  in  a  busi- 
ness carried  on  under  the  conditions  provided  for  in  the 
contract,  the  parties  thereto  became  partners  as  to  third 
persons.     It  clearly  provides  for  something  more  than  a 


290  PARTNER'S  POWER  TO  BIND  COPARTNER 

loan  of  money,  as  it  is  fairly  to  be  implied  from  it,  tliat 
Stanley  would  render  active  services  as  a  principal  in  the 
prosecution  of  the  business,  and  furnish  further  financial 
vAd  therefor  if  it  became  necessary,  and  he  deemed  it  advis- 
able to  do  so.  The  loan  was  not  one  made  to  Gorham 
generally,  but  was  for  the  benefit  of  the  particular  busi- 
ness in  whose  prosecution  Stanley  had  an  equal  interest, 
and  any  diversion  of  the  funds  from  such  use  was  strictly 
X^rohibited.  Each  party  was  authorized  to  charge  the  busi- 
ness with  interest  on  the  funds  advanced  by  him  for  its 
prosecution,  and  they  would  each  be  entitled  to  pro  rata  re- 
imbursement of  such  funds  from  the  assets  of  the  business 
in  case  of  a  deficiency  of  funds  to  pay  the  advances  in  full. 
In  that  respect  it  was  evidently  contemplated  that  each 
party  should  bear  any  loss  incurred  in  proportion  to  the 
advances  made  by  them  respectively.  For  all  this  Stanley 
was  to  receive  one-half  the  net  profits  of  the  business.  His 
right  to  profits  would  not  cease  upon  the  repayment  of  the 
original  loan,  or  depend  upon  the  value  of  the  services  ren- 
dered or  moneys  advanced,  or  either  of  them  alone,  but 
was  to  continue  as  long  as  the  business  was  carried  on. 
The  letter  of  the  contract  is  that,  in  consideration  of  the 
loatn  of  $750,  payable  in  two  years,  and  the  further  con- 
sideration of  services  in  securing  sales  in  said  business, 
and  further  moneys  furnished,  the  net  profits  are  to  be  di- 
vided. The  services  promised,  and  the  moneys  advanced 
and  to  be  advanced,  each  and  all  constituted  the  considera- 
tion for  the  division  of  the  profits. 

We  think  such  an  agreement,  within  all  authorities, 
constitutes  a  partnership  as  to  third  parties.  By  it  Stan- 
ley had  an  interest  in  the  general  business  of  the  concern; 
a  right  to  require  a  quarterly  account  of  its  transactions; 
authority  to  make  contracts  in  its  behalf,  and  an  irrevoca- 
ble right  to  demand  one-half  of  the  profits  of  the  business. 
That  the  original  loan  of  $750  was  secured  to  be  repaid 
by  Gorham  to   Stanley   does   not   preclude   the   conclusion 


HACKETT  V.  STANLEY  291 

that  they  were  partners,  for  it  is  entirely  competent  for 
one  partner  to  guarantee  another  against  loss,  in  whole  or 
in  part,  in  a  partnership  business,  if  the  parties  so  agree. 

The  application  of  the  rule  that  "participation  in 
profits"  renders  their  recipient  a  partner  in  the  business 
from  which  profits  are  derived,  as  to  third  persons,  has 
been  somewhat  restricted  by  modern  decisions,  but  we  think 
that  the  division  of  profits  must  still  be  considered  the 
most  important  element  in  all  contracts  by  which  the  true 
relation  of  parties  to  a  business  is  to  be  determined.  We 
think  this  rule  is  founded  in  strict  justice  and  sound  policy. 
There  can  be  no  injustice  in  imposing  upon  those  who  con- 
tract to  receive  the  fruits  of  an  adventure,  a  liability  for 
credits  contracted  in  its  aid,  and  which  are  essential  to  its 
successful  conduct  and  prosecution.  This  liability  does 
not,  and  ought  not,  to  depend  upon  the  intention  of  the 
parties  in  making  their  contract  to  shield  themselves  from 
liability;  but  upon  the  ground  that  it  is  against  public  pol- 
icy to  permit  persons  to  prosecute  an  enterprise  which, 
however  successful  it  may  for  a  time  appear  to  be,  is  sure 
in  the  end  to  result  in  advantage  to  its  secret  promoters 
alone,  and  the  ruin  and  disaster  of  its  creditors  and  others 
connected  with  it.  (AtJicrton  v.  Tilton,  44  X.  H.  452; 
Chase  v.  Barrett,  4  Paige,  159.)  Expected  profits  being 
the  motive  which  induces  the  prosecution  of  all  commer- 
cial and  business  enterprises,  their  accumulation  and  re- 
tention in  business  is  essential  to  their  success;  and  if  per- 
sons are  permitted,  by  secret  agreement,  to  appropriate 
them  to  their  own  use  and  throw  the  liabilities  incurred 
in  producing  them  upon  those  who  receive  only  a  portion 
of  the  benefits,  not  only  is  a  door  opened  to  the  perpetra- 
tion of  frauds,  but  such  frauds  are  rendered  inevitable. 

Exceptions  to  the  rule  are,  however,  found  in  cases 
where  a  share  in  profits  is  contracted  to  be  paid,  as  a  meas- 
ure of  compensation  to  employes  for  services  rendered 
in  the  business,  or  for  the  use  of  monevs  loaned  in  aid  of 


292  PARTNER'S  POWER  TO  BIND  COPARTNER 

the  enterprise ;  but  when  the  agreement  extends  beyond 
this  and  provides  for  a  proprietary  interest  in  the  profits 
as  a  compensation  for  money  advanced  and  time  and  serv- 
ices bestowed,  as  a  principal  in  its  prosecution,  we  think 
that  the  rule  still  requires  such  party  to  be  held  as  a  partner. 

The  rule  laid  down  in  Kent's  Commentaries  (vol.  3, 
25),  that  "the  test  of  partnership  is  a  community  of  profit; 
a  specific  interest  in  the  profits,  as  profits,  in  contradistinc- 
tion to  a  stipulated  portion  of  the  profits  as  a  compensa- 
tion for  services,"  was  approved  by  this  court  in  Lcggctt  v. 
Hyde  (58  N.  Y.  2^2),  in  which  case  Judge  Folger  says: 
"The  courts  of  this  state  have  always  adhered  to  this  doc- 
trine and  applied  or  recognized  it  in  the  cases  coming  be- 
fore them."  After  citing  numerous  cases  in  support  of 
the  statement,  he  proceeds :  "There  have  been  from  time 
to  time  certain  exceptions  established  to  this  rule  in  a  broad 
statement  of  it,  but  the  decisions  by  which  these  exceptions 
have  been  set  up  still  recognize  the  rule  that,  where  one  is 
interested  in  profits,  as  such,  he  is  a  partner  as  to  third 
persons.  These  exceptions  deal  with  the  case  of  an  agent, 
servant,  factor,  broker  or  employe,  who,  with  no  interest 
in  the  capital  or  business,  is  to  be  remunerated  for  his  serv- 
ices by  a  compensation  from  the  profits,  or  by  a  compen- 
sation measured  by  the  profits."  The  learned  judge,  after 
referring  to  the  English  cases  claimed  to  have  qualified, 
if  not  overruled,  the  cases  of  Grace  v.  Smith  (2  W.  Black, 
998),  and  IVaugh  v.  Carver  (2  H.  Bl.  235),  which  were 
the  foundation  of  the  doctrine  that  a  participation  in  profits 
renders  those  receiving  them  partners,  says  that  "without 
discussing  those  decisions  and  determining  just  how  far 
they  reach,  it  is  sufficient  to  say  that  they  are  not  controlling 
here,  that  the  rule  remains  in  this  state  as  it  has  long  been, 
and  that  we  should  be  governed  by  it  until  here,  as  in  Eng- 
land, the  legislature  shall  see  fit  to  abrogate  it." 

The  same  remark  may  also  be  applied  to  the  cases  of 
Harvey  v.  Childs  (28  Ohio  St.  319);  Hart  v.  Kellcy  (83 


HACKETT  V.  STANLEY  293 

Penn.  286)  ;  Beechcr  v.  Bitsh  (45  Mich.  188)  ;  Eastman 
V.  Clark  (53  N.  H.  276)  ;  Emmons  v.  West  field  (97  Mass. 
230),  decided  in  the  courts  of  our  sister  states,  in  which 
the  distinction  between  contracts  of  partnership  inter  scse 
and  those  making  the  parties  partners  as  to  third  persons, 
although  not  so  as  between  themselves,  is  sought  to  be 
practically  abolished. 

The  doctrine  that  persons  may  be  partners  as  to  third 
persons,  although  not  so  as  between  themselves,  and  al- 
though the  contract  of  partnership  contains  express  provi- 
sions repudiating  such  a  relation,  has  been  too  firmly  estab- 
lished in  this  state,  by  repeated  decisions,  to  be  now  dis- 
regarded by  its  courts.  (See  cases  cited  in  Leggett  v. 
Hyde.) 

It  is  claimed  that  this  doctrine  has  been  practically 
overruled  in  this  state  by  the  decisions,  in  this  court,  of 
Richardson  v.  Hughitt  (76  N.  Y.  55);  Burnett  v.  Snyder 
(Id.  344)  ;  Eager  v.  Crazvford  (Id.  97)  ;  Curry  v.  Fozvler 
(87  id.  33)  and  Cassidy  v.  Hall  (97  id.  159). 

We  do  not  think  these  cases  had  the  effect  claimed. 
They  were  all  cases  distinguished  by  peculiar  circumstances 
taking  them  out  of  the  operation  of  the  general  rule.  It 
cannot  be  disputed  but  that  a  loan  may  be  made  to  a  part- 
nership firm  on  conditions  by  which  the  lenders  may  secure 
a  limited  or  qualified  interest  in  certain  profits  of  the  firm 
without  making  them  partners  in  its  general  business,  but 
that  is  not  this  case. 

In  Richardson  v.  Hughitt  (supra),  Bench  Bros.  &  Co. 
were  a  manufacturing  firm,  carrying  on  the  business  of 
making  wagons,  and  Hughitt  contracted  to  advance  to  them 
$50  on  each  wagon  manufactured  by  them  and  delivered 
to  him,  to  the  extent  of  two  hundred  wagons,  under  an 
agreement  that  upon  the  sale  of  the  wagons  he  was  to  re- 
ceive back  the  moneys  advanced,  with  interest,  and  one- 
fourth  of  the  net  profits  on  such  wagons.  It  was  held  tl:at 
this  was  a  mere  loan  of  money  i)roviding  for  an  interest 
in  the  profits  as  a  compensation  for  the  money  loaned. 


294  PARTNER'S  POWER  TO  BIND  COPARTNER 

The  lender  secured  no  interest  in  the  general  business 
of  the  firm  or  interest  in  the  profits  made  therein,  and  did 
not  become  liable  for  its  debts.  It  is  quite  clear  that  if 
such  a  contract  had  been  made  after  the  wagons  were  fin- 
ished, it  would  have  created  simply  a  pledge  of  property 
for  the  payment  of  a  debt,  competent  for  the  parties  to 
make  and  which  would  not  have  made  the  pledgee  a  part- 
ner. The  fact  that  the  contract  was  executory  would  not 
alter  the  real  nature  of  the  transaction,  or  affect  the  rela- 
tions of  the  parties  to  third  persons. 

The  case  of  Eager  v.  Craivford  (supra)  was  a  pure 
loan  of  money  with  an  agreement  that  the  borrower  should 
pay  to  the  lender  on  the  first  day  of  each  month  one-half 
of  the  gross  receipts  of  the  business  carried  on  by  him  until 
the  whole  sum,  with  interest,  was  repaid.  The  dispute  in 
the  case  was  upon  the  question  whether  the  stipulation  for 
one-half  the  gross  receipts  was  intended  to  refer  to  profits. 
The  question  submitted  to  the  jury,  the  evidence  being 
conflicting,  was  whether  it  was  "the  real  understanding  be- 
tween the  parties  that  Crawford  should  participate  in  the 
profits,  as  such;  if  it  was,  it  would  constitute  a  partner- 
ship," otherwise  not.     This  court  approved  the  charge. 

In  Burnett  v.  Snyder  (supra),  two  of  the  members  of 
an  existing  firm,  composed  of  five  persons,  agreed  with 
Snyder,  for  a  good  consideration,  that  if  he  would  become 
liable  to  them  for  one-third  of  the  losses  sustained  by 
them  in  the  business  of  their  firm,  they  would  pay  to  him 
one-third  of  the  profits  received  by  them  in  such  business. 
For  obvious  reasons  it  was  held  that  Snyder,  under  this 
agreement,  took  no  interest  in  the  general  business  of  the 
firm,  and  did  not  become  a  member  thereof. 

In  Curry  v.  Fozvler  (supra)  W.  G.  and  J.  E.  McCor- 
mick  were  an  existing  firm  owning  certain  vacant  real  es- 
tate in  New  York,  which  the}^  desired  to  improve.  To 
enable  them  to  do  so  Fowler  loaned  $50,000  to  them,  tak- 
ing as  security  therefor  a  mortgage  upon  the  land,  with  an 
agreement  that  he  should  be  repaid  his  loan  and  interest, 


HACKETT  V.  STANLEY  295 

with  one-half  of  the  profits  of  the  adventure,  which  the 
McCormicks  guaranteed  should  amount  to  $12,500.  This 
case  was  decided  upon  the  authority  of  RicJiardson  v. 
Hiighitt  and  was  said  to  resemble  it  in  all  essential  particu- 
lars. 

In  Cassidy  et  al.  v.  Hall  (supra),  it  was  held  that  the 
defendants  were  mere  lenders  of  money  to  an  existing  cor- 
poration. The  opinion  states  that  "under  the  agreement 
the  advances  were  to  be  made  only  upon  such  orders  as  the 
defendants  approved,  and  the  most  that  can  be  claimed 
from  it  is  that  the  defendants  were  the  financial  agents  of 
the  company  to  make  advances  and  discount  their  paper 
for  the  purpose  of  relieving  the  company  from  the  finan- 
cial embarrassment  under  which  it  was  evidently  labor- 
ing, for  which  they,  the  defendants,  were  to  receive  a  pro- 
portion of  the  face  of  the  orders,  upon  which  the  advances 
were  made,  as  a  compensation  for  the  risks  they  incurred 
and  for  the  use  of  the  money  advanced  by  them.  They 
were  not  generally  interested  in  the  affairs  of  the  com- 
pany; but  only  for  a  special  and  specific  purpose,  and  in 
no  sense  were  they  partners." 

It  cannot  reasonably  be  claimed  that  either  of  these 
cases  is  an  authority  for  the  reversal  of  this  judgment. 
Whatever  might  have  been  their  bearing  if  they  related 
to  the  loan  of  money  alone,  we  will  not  say;  but  when  con- 
nected with  the  circumstance  that  the  defendant  was  ex- 
pected to  render  future  services  as  a  principal  and  furnish 
further  financial  aid,  with  a  certain  supervision  over  the 
conduct  of  the  business,  we  think  this  case  is  clearly  dis- 
tinguishable from  those  cited. 

In  the  view  taken  of  this  case,  it  is  quite  immaterial 
whether  the  plaintifif  extended  the  credit  to  Gorham  alone 
or  not,  as  the  defendant  was  held  liable  upon  the  ground 
that  as  to  third  persons  he  was  a  partner,  and  it  did  not 
afifect  that  liability,  whether  the  plaintiff  knew  the  fact  or 
not. 


296 


PARTNER'S  POWER  TO  BIND  COPARTNER 


The  exception  to  the  ruhng  of  the  court  sustaining  the 
objection  to  the  question  put  to  plaintiff  on  cross-examina- 
tion, as  to  whom  the  credit  was  furnished,  was  not  well 
taken,  as  the  fact  sought  to  be  proved  was  immaterial. 

The  judgment  should,  therefore,  be  affirmed. 

All  concur. 

Judgment  affirmed. 


i 


MUIR  V.  CITY  OF  GLASGOW  BANK  297 


MUIR  V.   CITY   OF   GLASGOW   BANK. 
In  the  House  of  Lords,  1879. 

Law  Reports,  4  Appeal  Cases,  22i7- 

William  Muir,  William  Thompson,  et  al.,  trustees  for 
Mrs.  Syme  and  Mrs.  Boyd,  accepted  as  part  of  the  trust 
estate,  stock  in  a  Scotch  banking  company.  By  the  deed  of 
co-partnership,  there  was  to  be  no  limit  whatever  to  the 
shareholders'  liability.  They  signed  the  deed  of  transfer 
"as  trust  disponees,"  and  accepted  the  stock  "as  trust  dis- 
ponees  aforesaid,  subject  to  the  articles  and  regulations  of 
the  said  company  in  the  same  manner  as  if  they  had  sub- 
scribed the  contract  of  co-partnership."  Their  names  and 
addresses  were  entered  in  the  stock  ledger  (the  register  of 
shareholders),  followed  by  the  words  "as  trust  disponees" 
for  Mrs.  Syme  and  ]\Irs.  Boyd.  The  individual  names  of 
William  Muir,  William  Thompson,  ct  al.  did  not  appean* 
in  any  list  of  shareholders  issued  to  the  public. 

The  bank  suspended  payment  with  immense  liability. 
The  liquidators  placed  William  Muir,  William  Thomp- 
son, et  al.  on  the  first  part  of  their  list  of  contributories  as 
liable  to  calls  "in  their  own  right."  A  petition  was  filed  by 
William  Muir,  William  Thompson,  et  al.  to  rectify 
the  list  of  contributories,  by  transferring  the  names  of  the 
petitioners  from  the  first  part  to  that  part  entitled  "second 
part — contributories  as  being  representatives  of  others." 

The  Court  of  Sessions  unanimously  held  that  the  trus- 
tees were  personally  liable  to  pay  all  calls  made  in  respect 
to  the  shares  they  held.  [Court  Sess.  Cas.,  4th  Series,  vol. 
vi,  p.  392;  Scot.  Law  Rep.,  vol.  xvi,  p.  147.] 

From  this  decision  the  trustees  appealed.^ 


'  The  facts  are  restated,  and  the  Reporter's  notes  of  th^  arguments 
of  counsel  are  omitted. 


298         PARTNER'S   POWER   TO   BIND   COPARTNER 

Lord  Penzance  :  The  question  involved  in  this  appeal, 
though  one  of  the  deepest  interest  to  the  parties  concerned, 
does  not  depend  for  its  solution  upon  any  very  numerous 
or  intricate  considerations. 

It  is  not  to  be  denied  that  the  appellants,  on  the  face  of 
the  transfer  deed  into  which  they  entered  with  the  bank- 
ing company  and  whereby  they  became  shareholders  in  it, 
announced  in  express  terms  that  they  did  so  "as  trust  dis- 
ponees"  for  other  people. 

The  question  is,  whether  the  statement  of  this  fact  has 
in  any  degree  exonerated  them  from  the  obligations  which 
attached  to  the  character  and  position  of  shareholders  which 
it  was  the  object  of  that  deed  to  confer  upon  them. 

Speaking  generally,  there  might  no  doubt  arise  an  in- 
ference (if  not  rebutted  by  other  circumstances)  that  a 
person  who  derived  no  benefit  himself,  and  who  acted 
only  for  the  benefit  of  others,  in  contracts  or  en- 
gagements of  any  kind  into  which  he  might  enter, 
would  not  intend  thereby  to  expose  himself  to  per- 
=pnal  liability  if  it  could  be  avoided.  A  general  considera- 
tion of  this  character  has,  I  think,  largely  pervaded  the 
reasoning  upon  which  the  exemption  of  the  appellants  from 
personal  liability  has  been  based  and  enforced  in  argument. 

But  meanwhile  it  will  not  be  doubted  that  a  person 
who,  in  his  capacity  of  trustee  or  executor,  might  choose 
to  carry  on  a  trade  for  the  benefit  of  those  beneficially  in- 
terested in  the  estate,  in  the  course  of  which  trade  debts  to 
third  persons  arose,  could  not  avoid  liability  on  those  debts 
by  merely  shewing  that  they  arose  out  of  matters  in  which 
he  acted  in  the  capacity  of  trustee  or  executor  only,  even 
tliough  he  should  be  able  to  shew,  in  addition,  that  the 
creditors  of  the  concern  knew  all  along  the  capacity  in 
which  he  acted. 

The  case  of  an  agent  who  acts  for  others  is,  of  course, 
entirely  different.  His  contracts  are  the  contracts  of  his 
principal;  and  the  liabilities  from  which,  as  a  general  rule, 


MUIR  z:  CITY  OF  GLASGOW  BANK  299 

he  is  personally  exempt,  fall  upon  his  principal  who  acted 
through  him. 

But  to  exonerate  a  trustee  something  more  is  necessary 
beyond  the  knowledge  of  those  who  deal  with  him  that  he  is 
acting  in  that  capacity,  and  it  would  not  be  sufficient  in  all 
cases  to  state  that  fact  on  the  face  of  any  contracts  he  may 
make.  To  exonerate  him  it  would  be  necessary  to  shew 
that  upon  a  proper  interpretation  of  any  contract  he  had 
made,  viewed  as  a  whole — in  its  language,  its  incidents,  and 
its  subject-matter — the  intention  of  the  parties  to  that  con- 
tract was  apparent  that  his  personal  liability  should  be 
excluded;  and  that  although  he  was  a  contracting  party  to 
the  obligation  the  creditors  should  look  to  the  trust  estate 
alone. 

These  propositions  are,  I  conceive,  conformable  to  the 
law  of  Scotland,  equally  with  that  of  this  country. 

It  is  not  enough,  then,  in  the  present  case,  to  shew  that 
the  appellants  on  the  face  of  the  transfer  deed  accepted 
the  "stock"  in  question  "as  trustee  disponees;"  but  they  must 
go  on  to  shew  that  the  proper  construction  of  that  instru- 
ment shewed  the  intention  of  the  parties  to  be  that,  being 
trustees,  they  should  not  be  personally  liable. 

It  becomes,  then,  material  to  inquire  what  was  the 
nature  of  the  partnership  whose  "stock"  they  agreed  to 
accept,  and  in  whose  business  they  agreed  to  become  part- 
ners— and  how  far  the  nature  of  that  "stock,"  and  the  con- 
stitution of  that  partnership,  is  consistent  with  the  exemp- 
tion which  they  now  claim. 

Having  thus  become  shareholders  in  a  partnership  the 
members  of  which  have  by  their  deed  of  partnership  agreed 
to  stand  upon  an  equal  footing,  one  with  the  other  entitled 
equally  to  the  profits,  and  bound  equally  to  the  losses, — the 
question  is  raised  whether,  by  stating  in  their  deed  of  trans- 
fer that  they  so  became  shareholders  as  trust  disponees  for 
other  persons,  the  appellants  have   altered  or  limited  the 


300         PARTNER'S   POWER  TO    BIND   COPARTNER 

obligations  that  otherwise  would  attach  to  them.     In  my 
opinion  they  have  not. 

There  are  many  contracts  in  respect  of  which  if  a  man 
were  to  state,  in  contracting",  that  he  only  did  so  as  trustee, 
it  is  quite  conceivable  that  his  contract  might  be  construed 
as  not  being  intended  to  bind  himself  personally.  The  case 
of  Gordon  v.  Campbell  [i  Bell's  App.,  428]  offers  an 
example  of  such  a  construction. 

Other  cases  may  be  easily  imagined  in  which  on  the 
one  hand  the  intention  to  restrict  the  liability  of  the  person 
contracting  may  be  clearly  inferred  from  the  character  in 
which  he  declared  that  he  contracted,  taken  in  connection 
with  the  other  circumstances  of  the  case,  and  in  which,  on 
the  other  hand,  nothing  is  to  be  found  inconsistent  with  that 
restriction  in  the  subject-matter  of  the  contract. 

But  in  this  case  the  subject-matter  of  the  contract  was 
the  "stock"  of  an  association  whose  shares  were,  by  the 
very  terms  of  its  constitution,  to  be  held  only  by  persons 
who  were  all  to  be  personally,  and  equally,  liable  to  its  obli- 
gations— and  it  cannot  be  held  that  the  liabilities  in  respect 
of  this  "stock"  were  intended  to  be  restricted  by  the  words 
"as  trust  disponees"  without  ignoring  the  very  nature  and 
inseparable  incidents  of  the  thing  which  formed  the  sub- 
ject-matter of  the  contract. 

In  a  word,  it  comes  to  this: — Such  a  thing  as  a  share 
in  this  association,  with  a  limited  liability  in  the  holder  of 
it,  did  not  exist — no  such  share  or  "stock"  had  ever  been 
created — no  provision  is  made  for  it  in  the  partnership  deed, 
and  every  provision  to  be  there  found  which  speaks  of  the 
liability  of  those  who  hold  the  shares  is  diametrically  and  in 
the  most  express  language  opposed  to  it.  If,  then,  the  ap- 
pellants did  not  become  bound  to  the  liabilities  attaching 
to  ordinary  shares,  and  ordinary  shareholders,  they  did 
not  become  bound  at  all,  and  the  contract  of  transfer  would 
be  void. 

But  before  your  Lordships  can  arrive  at  such  a  con- 


I 


MUIR  V.  CITY  OF  GLASGOW  BANK  301 

elusion  you  must,  I  think,  be  at  least  satisfied  that  the  words 
"as  trust  disponees,"  in  this  particular  deed,  so  clearly  im- 
ported an  intention  not  to  undertake  the  obligations  of 
shareholders  (though  the  entire  contract  might  thereby  be 
rendered  contradictory  and  absurd)  that  they  could  have 
been  introduced  for  no  other  purpose.  For  if  a  reasonable 
interpretation  can  be  assigned  to  these  words,  which  would 
permit  the  deed  to  stand  as  a  consistent  one  competent  to 
effect  that  transfer  of  stock  which  it  was  the  obvious  inten- 
tion of  the  parties  to  bring  about,  your  Lordships  would  be 
bound  to  accept  that  interpretation. 

Such  a  reasonable  interpretation  was  suggested  in  the 
case  of  Lumsdcn  v.  Buchanan  [Court  Sess.  Cas.  3rd  Series, 
vol.  ii,  p.  695,  and  vol.  iii,  (H.  L.)  p.  89;  4  Macq.  950], 
and  is  referred  to  by  the  Lord  President  in  his  judgment 
in  the  present  case.  His  Lordship  says :  "Hence  arose  the 
practice  referred  to  in  Lumsdcn  v.  Buchanan  of  taking- 
notice  of  trusts  in  the  transference  and  registration  of  such 
stocks,  not  for  the  purpose  of  altering  the  liability  of  the 
liolders  of  such  stock  as  compared  with  the  other  holders  of 
stock  in  the  same  company,  but  only  for  the  purpose  of 
marking  the  stock  as  the  property  of  the  particular  trust 
named  in  the  transference  and  in  the  register."  [Scottish 
Law  Reporter,  vol.  xvi,  p.  147;  Court  Sess.  Cas.,  4th  Series, 
vol.  vi,  p.  400.] 

The  whole  question  then  is,  as  it  seems  to  me,  one  of 
construction  as  to  the  proper  interpretation  to  be  put  upon 
this  transfer  deed  and  the  acts  of  the  appellants  under  it, 
and  for  the  solution  of  that  question  your  Lordships  have 
before  you  these  two  alternatives — on  the  one  hand  a  con- 
struction which  gives  a  reasonable  and  efficient  meaning  to 
the  words  "as  trust  disponees"  and  is  not  inconsistent  with 
that  transference  and  acceptance  of  "stock"  which  was  the 
sole  object  of  the  instrument — and  on  the  other  hand  a 
construction  which  defeats  the  intended  transfer  of  stock 
altogether,  and  reduces  the  deed  of  transfer  to  a  nullity. 


302         PARTNER'S   POWER   TO    BIND   COPARTNER 

According  to  all  known  principles  of  construction,  your 
Lordships  are,  I  apprehend,  bound  to  accept  the  construc- 
tion which  gives  effect  to  the  instrument. 

I  have  offered  these  remarks  to  the  House  upon  the 
footing  of  the  matter  being  "res  Integra,"  but  in  truth  the 
present  case  is,  in  my  opinion,  governed  in  principle  by  the 
case  of  Lnvisdcn  v.  Buchanan. 

What  the  principle  involved  in  that  decision  was,  is,  I 
think,  rightly  appreciated  and  declared  by  the  learned  Judges 
in  the  Court  of  Sessions. 

The  Lord  President  said  the  rule  of  liability  then  estab- 
lished might  be  stated  in  a  single  sentence,  as  follows :  "Per- 
sons becoming  partners  of  a  joint  stock  company  such  as  the 
Western  Bank,  and  being  registered  as  such,  cannot  es- 
cape from  the  full  liabilities  of  partners,  either  in  a  ques- 
tion with  creditors  of  the  company,  or  in  the  way  of  relief 
to  their  co-partners,  by  reason  of  the  fact  that  they  hold 
their  stock  in  trust  for  others,  and  are  described  as  trustees 
in  the  register  of  partners,  and  the  other  books  and  papers 
of  the  company."  And  Lord  Deas  said  that  the  grounds 
of  decision  in  Liunsden  v.  Buchanan  "resolved  themselves 
into  this,  that  where  trustees  join  in  a  contract  of  partner- 
ship for  trading  purposes,  such  as  a  contract  for  carrying 
on  the  business  of  banking,  the  mere  designation  of  them  as 
being  trustees  will  not  exempt  them  from  the  same  personal 
liability  as  is  undertaken  by  the  other  partners,  or  limit 
their  liability  to  the  value  of  the  trust  estate." 

[Earl  Cairns,  L.  C,  and  Lords  Platherley,  O'Hagan, 
Selborne  and  Blackburn  being  of  the  same  opinion,  on 
motion  of  the  Lord  Chancellor  the  appeal  was  dismissed  with 
costs.  ]  ^ 


'  The  opinions  of  the  other  learned  Lords  are  omitted. 


WILD  V.  DAVENPORT  303 


WILD  V.  DAVENPORT. 

In  the  Court  of  Errors  and  Appeals  of  New 
Jersey,,  1886. 

48  New  Jersey  Laiv  Reports,  129. 

On  a  writ  of  error  to  Somerset  Circuit. 

James  S.  Davenport,  Edward  L.  Vorhees,  William 
S.  Johnson  and  James  B.  Davenport  entered  into  part- 
nership under  the  firm  name  of  Davenport,  Johnson  &  Co., 
by  articles  of  copartnership  dated  November  ist.  1880.  The 
articles  provided  that  the  copartnership  should  commence 
November  ist,  1880,  and  continue  for  the  term  of  three 
years.  The  copartnership  articles  contained  a  provision 
that  in  case  any  of  the  said  parties  should  die  before  the 
expiration  of  the  copartnership,  the  sum  standing  to  his 
credit  at  that  time  in  the  assets  of  the  firm  should  remain 
as  a  part  of  the  capital  of  the  firm  until  the  expiration  of 
the  copartnership,  and  at  the  expiration  of  the  copartner- 
ship all  moneys  contributed  to  the  capital  of  the  firm  by 
any  of  the  members  of  the  firm  should  first  be  repaid  to 
such  contributor  out  of  the  assets  of  the  firm  before  any 
division  of  the  profits  should  be  made. 

Johnson  died  in  July,  1881,  leaving  a  will  appointing 
the  defendants  in  error  executors.  He  had  contributed 
$15,000  of  capital,  and  at  his  death,  $17,000  were  stand- 
ing to  his  credit.  This  sum  continued  in  the  business  until 
the  expiration  of  the  partnership  on  October  31st,  1883. 
The  business  was  carried  on  by  the  surviving  partners.  The 
executors  examined  the  books  and  accounts  of  the  firm 
from  time  to  time,  but  did  not  otherwise  interfere  with  or 
participate  in  the  business.  It  did  not  appear  that  any 
])rofits  were  ever  received  by  them  from  the  business,  or 
that  the  capital  standing  in  the  deceased  partner's  nnnc 
was  ever  withdrawn  by  them. 


304         PARTNER'S   POWER   TO   BIND   COPARTNER 

In  October,  1883,  plaintiff  sold  the  firm  of  Davenport, 
Johnson  &  Co.,  a  bill  of  merchandise,  and  this  suit  was 
brought  against  the  surviving  partners  and  the  executors 
of  the  deceased  partner,  to  charge  them  personally  jointly 
as  partners. 

The  judge  at  the  Circuit  decided  that  the  executors 
of  the  deceased  partner  could  not  be  held  personally  liable 
as  partners. 

Depue,  J.  The  bill  of  exceptions  in  this  case  pre- 
sents the  single  question  whether,  upon  the  facts  stated,  the 
defendants  in  error,  executors  of  the  deceased  partner, 
l^ecame  personally  liable  as  partners  for  debts  contracted 
by  the  firm  after  the  death  of  the  testator. 

Partnership  is  a  relation  arising  from  contract.  It  is 
usually  defined  to  be  a  voluntary  contract  between  compe- 
tent persons  to  place  their  money,  effects,  labor  and  skill, 
or  some  or  all  of  them,  in  lawful  commerce  or  business, 
upon  the  understanding  that  there  shall  be  a  communion 
of  the  profits  thereof  between  them.  Story  on  Part.,  §  2  ;  3 
Kent  23.  Mr.  Justice  Lindley  quotes  from  "Words  of 
Celebrity"  a  number  of  definitions  of  partnership,  in  all  of 
which  the  elements  of  contract  or  agreement  is  funda- 
mental. I  Lind.  on  Part.  2  Inter  sese  the  fact  of  partner- 
ship, as  well  as  the  rights,  duties  and  obligations  of  partners, 
arises  wholly  from  the  terms  of  the  contract,  and  as  to 
third  persons  and  creditors  the  same  rule  prevails,  except 
where  the  persons  concerned  have  held  themselves  out  as 
partners — have  acted  ostensibly  as  interested  in  the  busi- 
ness as  if  they  were  partners  in  it,  and  have  so  conducted 
themselves  as  to  lead  people  to  suppose  that  they  were 
willing  to  be  regarded  by  them  as  if  they  were  partners  in 
fact.  I  Lind.  on  Part.  47 ;  Central  Saz'ings  Bank  v.  Walker, 
66  N.  Y.  424 ;  Mershon  v.  Hohensack,  2  Zab.  372 ;  3  Id. 
580.1 


*  His  discussion  of  the  cases  reprinted  in  this  section  is  omitted. 


WILD  z:   DAVENPORT  305 

The  decisions  gennane  to  the  particular  case  now  be- 
fore the  court  have  gone  upon  the  same  principle.  As  a 
general  rule,  the  death  of  one  partner  works  a  dissolution 
of  the  partnership.  If  an  executor  engages  in  business, 
either  as  a  sole  trader  or  in  a  partnership,  with  the  tes- 
tator's assets,  though  he  does  it  as  executor,  and  not  for 
his  individual  benefit,  he  will  be  personally  liable  for  the 
debts  incurred  in  the  business,  and  this  although  he  does 
so  in  compliance  with  directions  in  the  testator's  will,  or 
in  conformity  with  articles  of  partnership  to  which  the 
testator  was  a  party  which  provide,  as  articles  of  partner- 
ship sometimes  provide,  that  on  the  death  of  a  partner 
his  executor  or  personal  representatives  shall  be  admitted 
into  the  firm.  JVightman  v.  Tozcnroc,  i  'M.  &  S.  412;  La- 
houckcre  v.  Tuppcr,  11  Moore  P.  C.  198,  221;  Laiblc  v. 
Ferry,  5  Stew.  Eq.  791 ;  2  Liud.  on  Part.  1060,  1061 ;  Story 
on  Part.,  §  70. 

A  provision  in  articles  of  partnership  that  on  the  death 
of  a  partner  his  executor  or  personal  representative,  or 
some  other  person,  shall  be  entitled  to  the  place  of  a  de- 
ceased partner  in  the  firm,  with  the  capital  of  the  deceased 
in  the  firm  business,  or  some  part  of  it,  is  binding  upon  the 
surviving  partner  to  admit  the  executor,  personal  repre- 
sentative or  nominee  of  the  deceased  partner,  but  does  not 
bind  the  latter  to  come  in.  They  have  an  option  to  come 
in  or  not,  and  a  reasonable  time  within  which  to  elect. 
Pigott  V.  Baglcy,  i  INIcC.  &  Y.  569;  Madgwick  v.  Wimhle, 
,6  Beav.  495;  Downs  v.  Collins,  6  Hare,  418;  2  Lind.  on 
'Part.  852.  An  executor  or  nominee  of  a  deceased  partner 
coming  in  under  such  a  provision  in  partnership  articles 
comes  in  as  a  partner,  with  all  the  rights  and  liabilities  of 
a  partner,  and  consequently  becomes  personally  liable  for 
debts  contracted  in  the  business.  He  is  made  personally 
liable  for  debts  for  the  reason  that  he  has  of  his  own  voli- 
tion engaged  in  the  business  as  a  principal,  and  is  a  con- 
tracting party.     As  was  said  by  Lord  Eldon,  in  Ex  parte 


306         PARTNER'S   POWER   TO   BIND   COPARTNER 

Garland,  lo  Ves.  119,  "he  places  himself  in  that  situation 
by  his  own  choice,  judging  for  himself  whether  it  is  fit 
and  safe  to  enter  into  that  situation  and  contract  that  sort 
of  liability;"  and  if  he  has  acted  in  compliance  with  the 
testator's  directions,  he  will  be  entitled  to  indemnity  out 
of  the  testator's  estate  to  the  extent  of  the  fund  which  the 
testator  has  embarked  in  the  business,  and  no  further.  Ex 
parte  Garland,  10  Ves.  109;  In  re  Johnson,  15  Ch.  Div.  548; 
Laible  v.  Ferry,  5  Stew.  Eq.  791 ;  Burwell  v.  Mandcville's 
Ex'rs,  2  How.  (U.  S.)  560. 

On  the  other  hand,  a  stipulation  in  partnership  articles, 
that  upon  the  death  of  a  partner  his  capital  shall  remain  in 
the  business  until  the  expiration  of  the  prescribed  term  of  the 
partnership,  is  binding  as  well  upon  the  estate  of  the  de- 
ceased as  upon  the  surviving  partner.  Scholeficld  v.  Eichcl- 
berger,  7  Pet.  586 ;  Burwell  v.  Mandeville's  Ex'rs,  2  Hoiv. 
(U.  S.)  560;  Dozvns  V.  Collins,  6  Hare  418,  437;  Story  on 
Part.,  §  261  a.  Where  the  provision  in  the  partnership 
article  is  simply  that  the  deceased  partner's  capital  shall 
remain  in  the  business,  the  executor  is  not  admitted  into  the 
management  of  the  business.  The  control  of  the  business 
is  with  the  surviving  partner.  The  executor  cannot  with- 
draw the  capital  of  the  deceased  partner  without  subjecting 
the  estate  to  liability  to  suit,  nor  can  he  exercise  the  control 
of  a  partner  in  the  conduct  of  the  business.  In  this  situa- 
tion none  of  the  reasons  for  the  liability  of  a  partner  exist 
as  against  him.  Hence  it  is  that  when  by  the  articles  of 
partnership  a  new  member  is  brought  into  the  firm  on  the 
death  of  a  partner,  as  an  executor  or  trustee,  firm  credi- 
tors becoming  such  after  the  partner's  death  have  the  per- 
sonal liability  of  the  admitted  member  of  the  firm;  but 
where  by  the  articles  the  capital  only  of  the  deceased  part- 
ner is  continued  in  the  firm  without  any  person  being  added, 
such  creditors  have  only  the  liability  of  the  surviving  part- 
ner, by  whom  the  business  is  carried  on,  and  the  security 
of  that  part  of  the  estate  of  the  deceased  partner  which  is 
left  in  the  business.     Parsons  on  Part.  454. 


WILD  z:   DAVENPORT  307 

Holme  V.  Hammond,  L.  R.,  y  Exch.  218,  is  a  case 
exactly  in  point.     In  that  case  three  persons   agreed,   by- 
articles  of  partnership,  to  conduct  business  for  a  term  of 
seven  years,  with  a  provision  that  if  either  died  during  the 
partnership  term,  the  surviving  members  were  to  continue 
the  business  upon  the  terms  expressed  in  the  articles  of 
partnership,  and,   for  the  residue  of  the  term,  to  pay  the 
representatives  of  such  deceased  partner  the  share  of  the 
profits  he  would  have  been  entitled  to  if  living.     One  of 
the  partners  died  during  the  partnership  term,  and  the  sur- 
viving members  continued  the  business.     The  executors  of 
the  deceased  partner  never  interfered  in  the  business,  but 
they  claimed  the  share  of  profits  the  deceased  would  have 
been  entitled  to.     No  settlement  of  accounts  respecting  tlie 
interest  of  the  deceased  partner  in  the  partnership  business 
had  been  made,  but  a  sum  had  been  paid  his  executors  gen- 
erally, part  of  which  would  be  applicable  to  profits  realized 
after  his  death.     In  an  action  for  a  debt  contracted  after  his 
death,   against  the  executors  of  the  deceased  partner  and 
the  surviving  partner,  the  Court  of  Exchequer  held  that 
the  executors  could  not  be  held  as  partners.     Kelly,  Chief 
Baron,  speaking  of  judicial  dicta  to  the  effect  that  the  mere 
participation  in  profits  made  the  participator  a  partner,  said 
that  looking  to  the  decisions  themselves  in  which  the  ques- 
tion had  arisen,  it  would  be  seen  that  in  no  case  had  the 
party  sought  to  be  charged  been  held  liable,  except  where  a 
contract  of  copartnership  had  been  entered  into:  that  when- 
ever the  plaintiff  had  failed  to  establish  a  contract  of  copart- 
nership the  action  had  failed ;  that  upon  the  death  of  on;^ 
partner  the  partnership  was  dissolved  by  operation  of  law. 
and  the  surviving  partners  from  that  time  carried  on  the 
business;  but  that  this  was,  in  contemplation  of  law,  a  new 
partnership,  and  the  executors  of  the  deceased  partner  could 
not  become  partners  with  the  survivors  without  some  agree- 
ment, express  or  implied,  to  which  they  were  parties.     Mar- 
tin, Baron,  said  that  the  defendants  did  nothing  more  than 
claim  and  receive  profits  under  the  articles  of  partnership, 


308         PARTNER'S   POWER   TO   BIND   COPARTNER 

and  that  in  his  opinion  that  act  did  not  make  them  liable  to 
the  plaintiff's  demand;  that  they  did  nothing  in  their  own 
behalf  at  all;  they  merely  did  that  which  a  court  of  equity 
would  have  compelled  them  to  do  as  executors  under  the 
will,  and  that  it  would  be  contrary  to  reason  to  hold  them 
liable  by  that  act  to  a  responsibility  which  must  of  neces- 
sity be  borne  by  them  in  their  own  personal  capacity,  and 
paid  out  of  their  private  funds.  Bramwell,  Baron,  assigned, 
as  the  ground  of  his  judgment,  that  the  representatives  of 
the  deceased  partner  were  not  to  be  partners  with  the  sur- 
vivors ;  that  they  could  not  interfere  ■\^'ith  the  business  or 
its  management  in  any  way — could  not  say  that  any  par- 
ticular business  should  be  done  by  the  firm,  or  that  it  should 
not  be  done,  or  how  it  should  be  done ;  that  they  could 
neither  make,  nor  order  a  contract,  nor  forbid,  nor  perform, 
nor  enforce,  nor  release  one. 

In  Holme  v.  Hainnwnd  there  was  not,  in  fact,  any 
capital  belonging  to  the  firm  at  the  death  of  the  deceased 
partner,  except  office  furniture  of  the  value  of  £ioo,  and 
the  articles  of  partnership  did  not  provide  for  the  continu- 
ance of  a  deceased  partner's  capital  in  the  firm,  though  it 
contained  a  provision  that  each  partner  should  contribute 
capital  and  share  profits  and  losses  equally.  Kelly,  Chief 
Baron,  and  jMartin  and  Cleasby,  Barons,  intimated  an  opin- 
ion that  the  result  would  have  been  different  if  the  execu- 
tors had  voluntarily  left  capital  belonging  to  the  deceased  in 
the  firm.  That  question  does  not  arise  in  this  case.  Here 
the  articles  of  partnership  provided  for  the  retention  of 
the  testator's  capital  in  the  firm  until  the  expiration  of  the 
term  of  the  partnership,  and  the  executors  did  nothing  of 
their  own  volition,  but  simply  conformed  to  the  obligation 
entered  into  by  the  testator. 

The  cases  in  which  the  precise  question  has  been  raised 
which  this  bill  of  exceptions  raises  are  few.  The  cases  cited 
by  the  plaintiff  in  error  from  the  English  and  American 
courts  are  those  in  which  the  personal  liability  of  an  execu- 
tor voluntarily  engaging  in  business  with  his  testator's  as- 


WILD  z:   DAVENPORT  309 

sets  has  been  adjudged,  or  the  extent  of  the  right  of  part- 
nership creditors  to  charge  the  estate  of  a  deceased  partner 
for  debts  contracted  after  his  death  has  been  involved. 
Wightman  v.  Townroc;  Laboiichere  v.  Tapper;  Ex  parte 
Garland;  Edgar  v.  Cooke,  4  Ala.  {N.  S.)  588;  Thompson 
V.  Brozvn,  4  Johns.  Ch.  619;  Sfanwood  v.  Owen,  14  Gray, 
195,  are  cases  of  this  class.  The  only  cases  in  American 
courts  presenting  directly  the  question  raised  in  this  case 
that  have  come  under  my  observation  are  Oivens  v.  Mack- 
all,  2,2)  ^^d-  382,  and  Richter  v.  Poppenhiiysen,  39  How.  Pr. 
83.  and  both  of  these  decisions  are  with  the  defendants  in 
error. 

Nor  did  the  defendants  become  partners  in  the  busi- 
ness by  reason  of  their  examination  into  the  affairs  of  the 
firm.  This  was  a  duty  they  performed  in  the  execution  of 
the  trust  arising  out  of  their  executorship.  Nor  are  the 
rights  of  the  creditors  of  the  deceased  partner  to  have  the 
estate  of  the  testator  settled  up.  and  their  debts  paid  at  all 
involved  in  this  controversy.  When  the  contingency  arises 
upon  which  the  payment  of  the  testator's  debts  is  involved, 
a  court  of  equity  will  be  competent  to  afford  them  adequate 
relief  against  tying  up  the  estate  of  the  testator  to  the  preju- 
dice of  his  creditors. 

Upon  the  case  presented  we  think  that  the  decision  of 
the  learned  judge  that  the  defendants  in  error  were  not 
liable  was  correct,  and  the  judgment  should  be  affirmed. 


310         PARTNER'S   POWER  TO   BIND   COPARTNER 


SECTION  2.— LIABILITY  ON  CONTRACT  CON- 
TINUED—CONTRACT WITHIN  THE  SCOPE, 
BUT  NOT  FOR  THE  BENEFIT  OF  THE 
BUSINESS. 


LANE  V.  WILLIAMS. 
In  the  High  Court  of  Chancery,  1692. 

2   Vernon's  Reports,  2y~,  292/ 

/.  S.  and  defendant  Williams  testator  were  partners  as 
woollen-drapers,  /.  vS'.  gives  a  note  to  the  plaintiff  for 
150I.  received  and  borrowed  of  him,  which  he  promises  to 
repay,  and  subscribed  it  for  himself  and  partner.  The  bill 
was  for  a  discovery  and  satisfaction  out  of  the  assets  against 
JVilliaiiis  the  executor  of  the  surviving  partner,  to  oblige 
him  to  pay,  it  being  insisted  for  the  defendant  at  the  Rolls, 
that  this  money  was  never  brought  into  trade,  nor  was 
contracted  upon  the  account  of  the  partnership;  and  there- 
fore, although  one  partner  signed  it,  as  for  himself  and 
partner,  fJiaf  could  not  bind  the  partner  that  was  not  privy 
nor  consenting  thereunto ;  and  the  master  of  the  Rolls  dis- 
missed the  bill. 

Per  Cur.  The  money  being  paid  at  the  shop,  the  note 
of  one  partner  binds  both :  and  tho'  at  law  the  note  stands 
good  only  against  the  executor  of  the  surviving  partner, 
who  was  Ncivherry,  who  received  the  money,  and  signed 
the  note,  yet  proper  in  equity  to  follow  the  estate  of  Wil- 
liams for  satisfaction;  and  decreed  it  accordingly.- 


^  There  are  two  reports  of  this  case  in  Vernon.  The  statement 
of  facts  here  printed  is  taken  from  the  first  report,  the  final  action 
of  the  Court  is  from  the  second  report. 

'^Accord:  Sutton  v.  Gregory,  2  Peake,  iSO,  i"97;  Sanderson  v. 
Brooksbank,  4  C.  &  P.,  286,  1830;  Ex  parte  Bushell,  3  M.  D.  &  De  G., 
615,   1844. 

Compare:  Wintle  v.  Combes,  i  C.  &  J.  316,  183 1.  (A  and  B  were 
partners,  B  being  a  secret  partner,  trading  under  the  name  of,  "A  & 
Co."     A  raised  money  for  his  own  purposes   from  C  by  accepting  a 


LANE  V.  WILLIAMS  311 

bill  of  exchange  as  "A  &  Co."  Held,  that  the  undisclosed  or  secret 
partner  was  liable  on  tlie  acceptance.) 

Potter  v.  Price,  3  Pitts.  (Pa.  Sup.  Ct.)  136,  1869.  (A  anc|  B  were  in 
partnership.  Action  against  firm  on  note  signed  in  firm  name.  Judg- 
ment for  want  of  a  sufficient  affidavit  of  defense.  Appeal.  Williams, 
J.:  "The  affidavit  of  defence,  filed  by  Potter  in  this  case,  alleges  that 
the  due  bill  upon  which  suit  is  brought  was  not  given  for  goods  pr 
money  on  account  of  the  said  firm,  and  was  never  used  in  the  busi- 
ness of  the  said  Potter  &  Jones,  but  was  given  by  James  N.  Jones  for 
money  borrowed  of  the  plaintiff  for  his  own  sole  and  individual  use 
and  benefit,  and  without  the  knowledge  of  the  deponent.  But  there 
is  no  averment  that  the  plaintiff  knew  that  the  money  was  borrowed 
by  Jones  for  his  individual  use  and  benefit,  or  that  he  had  notice  of 
any  facts  that  ought  to  have  put  him  on  inquiry,  and  in  this  respect 
the  affidavit  is  fatally  defective."     Judgment  affirmed.) 

Benninger  v.  Hess,  41  Ohio  St.  64,  1884.  (A  and  B  et  al.  were 
in  partnership.  A  often  borrowed  money  for  firm  purposes  from  C. 
A  requested  C  to  lend  the  firm  1500.  C  complied  with  this  request, 
A  receiving  the  money.  Subsequently,  A  gave  to  C  a  note  for  the 
amount  of  the  loan  signed  by  himself.  A,  as  promisor,  A  endorsing 
the  note  in  the  firm  name.  C  sued  the  firm  on  the  note.  B  et  al. 
contended  that  the  note  and  its  endorsement  was  without  their  knowl- 
edge, and  that  the  money  borrowed  was  not  applied  to  the  use  of 
the  firm.  Held,  affirming  a  judgment  for  the  plaintiff,  that  the  obli- 
gation of  the  firm  to  repay  the  loan  became  fixed  at  the  moment 
the  money  was  lent  in  good  faith  on  the  credit  of  the  firm.  Dickman, 
J.  "And,  as  in  the  case  at  bar,  if  a  partner  borrows  money  for  the 
use  of  the  partnership,  his  declarations  made  at  the  time  of  the 
transaction,  will  be  competent  to  show  that  the  act  was  done  in 
behalf  of  the  partnership,  and  if  the  credit  was  obtained  on  the 
faith  of  such  declaration,  the  falsity  of  the  representation  will  not 
be  material."    p.  67.) 

A  fortiori,  if  a  partner  borrows  money  on  the  firm  credit,  in  order 
to  recover  from  the  firm,  it  is  not  necessary  to  shoiv  that  he  after- 
wards applied  the  money  loaned  to   the  use  of  the  firm. 

Church  V.  Goodsell,  5  Wend.  (N.  Y.)  223,  1830.  "Where  a  gen- 
eral partnership  exists,  and  money  is  borrowed  by  one  of  the  firm 
in  the  name  of  the  firm,  all  the  partners  are  liable,  although  the 
money  when  obtained  be  appropriated  by  the  partner  borrowing  it 
to  his  own  use."  Marcy,  J.,  p.  224 ;  Whitaker  v.  Brown,  16  Wend. 
(N.  Y.)  505,  1836.  "It  would  not  be  necessary  for  the  lender  *  *  * 
to  show  that  the  partner  who  borrowed  the  money  or  received  it 
for  the  firm,  actually  applied  it  to  partnership  purposes."  Chancellor 
Walworth,  p.  508;  Stark  1:  Corey,  45  111.  431,  1867;  Kleinhaus  z: 
Generous,  25  Ohio  St.  667,  1874. 

Compare  the  following  cases  zchere  a  partner  for  his  own  pur- 
poses sells  commercial  paper  belonging  to  the  firm,  and  endorses  the 
same    in    the   name   of   the  firm. 

Swan  V.  Steele,  7  East,  210,  1806.  (A,  B  and  C  traded  as  part- 
ners in  the  cotton  business  under  the  name  of  "A  &  B,"  C  not  being 
known  as  a  partner.  The  firm  received  in  the  course  of  business  a 
bill  of  exchange.  A  and  B  were  in  business  as  grocers.  In  this 
business  they  likewise  traded  as  "A  &  B."  C  was  not  interested  in 
the  grocery  business.  A  and  B  owed  D  for  a  supply  of  groceries. 
Not  being  able  to  meet  the  bill,  A  and  B  gave  the  bill  of  exchange 
which  they  had  received  in  the  cotton  business  to  D  endorsing  the 
same  "A  &  B."  D  was  ignorant  of  the  existence  of  C.  and  C  never 
authorized  the  use  of  notes  received  in  the  cotton  business  to  dis- 
charge the  debts  of  the  grocery  business.  Held,  that  D  could  re- 
cover in  an  action  of  assumpsit  on  the  endorsement  against  C.  Ac- 
cord:  Lewis  V.  Reilly.  i  Q.  B.  [i  Ad.  &  E.  n.  s.],  349,  1841.) 


312         PARTNER'S   POWER  TO   BIND   COPARTNER 


BOND  V.  GIBSON. 
In  the  Court  of  King's  Bench,  at  Nisi  Prius,  1800. 

I    CampbcU's  Reports,   185. 

Assumpsit  for  goods  sold  and  delivered.  It  appeared 
that  while  the  defendants  were  carrying  on  the  trade  of 
harness-makers  together,  Jephson  bought  of  the  plaintiff 
a  great  number  of  bits  to  be  made  up  into  bridles,  which 
he  carried  away  himself;  but  that  instead  of  bringing  them 
to  the  shop  of  himself  and  his  copartner,  he  immediately 
pawned  them  to  raise  money  for  his  own  use. 

Gazelee,  for  the  defendant  Gibson,  contended,  that 
this  could  not  be  considered  a  partnership  debt  as  the  goods 
had  not  been  bought  on  the  partnership  account,  and  the 
credit  appeared  to  have  been  given  to  Jephson  only.  He 
allowed  the  case  would  have  been  different,  had  the  goods 
once  been  mixed  with  the  partnership  stock,  or  if  proof 
had  been  given  of  former  dealings  upon  credit  between  the 
plaintiff  and  the  defendants. 

Lord  Ellenborough.  Unless  the  seller  is  guilty  of 
collusion,  a  sale  to  one  partner  is  a  sale  to  the  partnership, 
with  whatever  view  the  goods  may  be  bought,  and  to  what- 
ever purposes  they  may  be  applied.  I  will  take  it  that 
Jephson  here  meant  to  cheat  his  copartner;  still  the  seller 
is  not  on  that  account  to  suffer.  He  is  innocent;  and  he 
had  a  right  to  suppose  that  this  individual  acted  for  the 
partnership. 


MORETON  V.  HARDERN  313 


SECTION  3.— LIABILITY  IN  TORT. 


MORETON  v.  HARDERN. 
In  the  Court  of  King's  Bench,  1825. 

4   Barnezvall   and   Crcsszccll's   Reports,   223. 

Case.  The  first  count  alleged  that  the  plaintiff  on, 
&c.,  was  passing  along  a  public  highway,  at,  &c.,  and  that 
defendants  were  then  and  there  possessed  of  a  coach  and 
certain  horses  drawing  the  same,  which  were  under  the 
care  and  management  "of  a  certain  then  servant  of  the  de- 
fendants," who  was  driving  the  same.  Nevertheless,  the 
said  defendants,  by  their  said  servant,  so  carelessly  and  neg- 
ligently drove  the  coach  and  horses,  that  the  wheels  ran 
with  great  force  against  the  plaintiff,  whereby  one  of  his 
legs  was  broken,  &c.  The  second  count  stated  that  the 
coach  was  under  the  "care  and  management  of  the  de- 
fendants." Plea,  general  issue.  At  the  trial  before  JVar- 
ren  C.  J.,  of  Chester,  at  the  last  Summer  assizes  for  that 
place,  it  appeared  that  the  defendants  were  proprietors  of 
a  stage-coach  travelling  from  Congleton  to  Manchester. 
The  plaintiff,  at  the  time  when  the  accident  happened,  was 
driving  a  cart  along  the  high  road.  The  coach  was  driven 
by  the  defendant,  Hardern,  and  the  coachman  employed  by 
the  proprietors  to  drive  was  sitting  by  his  side.  The  coach 
ran  against  the  defendant,  and  thereby  caused  the  injury 
stated  in  the  declaration.  It  did  not  appear  that  Hardern 
saw  the  plaintiff  at  that  time.  For  the  defendants  it  was 
objected,  that  the  first  count  was  not  proved,  inasmuch  as 
the  coach  was  driven  by  one  of  the  defendants,  and  not 
by  their  servant;  and  that  the  second  count  could  not  be 
sustained,  for  that  the  injury  being  immediate,  and  occa- 
sioned directly  by  the  act  of  one  of  the  defendants,  the  ac- 


314         PARTNER'S   POWER   TO    BIND   COPARTNER 

tion  should  have  been  trespass  and  not  case.  The  learned 
Judge  reserved  these  points,  and  left  the  case  to  the  jury, 
who  found  a  verdict  for  the  plaintiff,  damages  200/.^  and 
that  the  accident  Vi^as  occasioned  by  the  negligence  of  the 
defendant,  Hardern.  A  nonsuit  was  thereupon  entered, 
and  the  plaintiff  had  leave  to  move  to  enter  a  verdict  in  his 
favor  for  200/.  A  rule  nisi  for  that  purpose  was  obtained 
in  Michachnas  term.^ 

HoLROYD,  J. :  I  think  that  the  non-suit  in  this  case  cannot 
be  supported.  *  *  *  Xhe  real  ground  of  action  is  the 
negligence  of  Hardern.  It  is  brought  against  all  the  proprie- 
tors. They  are  all  responsible  for  the  person  appointed  to 
drive,  whether  the  person  be  or  be  not  one  of  themselves. 
They  are  answerable  as  the  owners  of  the  coach  and  horses. 
Trespass  might  lie  against  the  driver  by  reason  of  his  doing 
the  particular  act;  but  still  there  would  be  a  ground  of  action 
against  his  co-proprietors,  and  that  could  only  be  an  action 
on  the  case,  for  they  are  not  by  his  act  made  co-trespassers. 
If  case  lies  against  them,  it  lies  against  him  also  as  a  joint 
proprietor,  if  a  ground  of  action  remains  after  the  trespass 
has  been  waived.^ 

Rule  absolute.^ 


^  The  arguments  of  counsel  are  omitted. 

*The  opinions  of  Bailey,  J.  and  Littledale,  J.  are  omitted.  All  three 
judges  agreed. 

^Accord:  Champion  v.  Bostwick,  18  Wend.  175,  1837;  Steel  v. 
Lester,  L.  R.  3,  C.  P.  D.  121,  1877,  especially  language  of  Lindley,  J., 
p.  128;  McCarragher  v.  Gaskell,  42  Hun  (N.  Y.),  451,  1886,  p.  453- 


NISBET  r.  PATTON  315 


NISBET  v.  PATTON. 
In  the  Supreme  Court  of  Pennsylvania,  1833. 

4  Razi'le's  Pennsylvania  Reports,  120. 

On  the  return  of  a  writ  of  error  to  the  District  Court, 
for  the  City  and  County  of  Philadelphia,  it  appeared  that 
this  was  an  action  of  trover,  brought  by  James  Patton  and 
others,  assignees  of  Henry  Simpson,  against  Michael  Nis- 
hct  and  Dai'id  C.  Wood,  trading  under  the  firm  of  Michael 
Nishct  &  Company,  for  the  conversion  of  six  promissory 
notes,  drawn  by  different  persons,  in  favour  of  Henry  Simp- 
son. 

Simpson,  who  was  a  dealer  in  dry  goods,  had  been  in 
the  habit  of  depositing  goods  with  the  defendants  below, 
who  advanced  their  notes  upon  them.  The  notes  for  the 
conversion  of  which  this  suit  was  brought,  had  been  placed 
in  the  hands  of  the  defendants  below,  with  an  understand- 
ing, that  when  goods  were  deposited  with  them,  the  notes 
were  to  be  returned.  On  the  day  of  Simpson's  failure, 
which  took  place  on  the  12th  January,  1826,  he  deposited  a 
quantity  of  goods  with  the  defendants,  and  on  the  follow- 
ing day  he  executed  to  the  plaintiffs  below  an  assignment 
for  the  benefit  of  his  creditors.  On  the  same  day  his  as- 
signees sent  to  demand  the  notes.  Nisbet,  on  whom  the 
demand  was  made,  said  he  would  deliver  the  notes,  but 
could  not  get  them  then,  as  they  were  locked  up  in  his  fire 
proof,  and  his  book-keeper  was  gone  home  with  the  key, 
but  promised  on  the  honour  of  a  gentleman,  to  give  them 
up  in  the  morning.  On  being  called  on  again  on  the  fol- 
lowing morning,  he  said  that  he  would  not  give  them  up, 
or  that  he  had  not  them.  The  demand  was  made  on  Nisbet 
alone,  Wood  not  being  present. 

On  the  part  of  the  defendants  below,  it  appeared,  that 
Michael  Nisbet,  a  short  time  previous  to  the  formation  of 


316         PARTNER'S   POWER  TO   BIND   COPARTNER 

the  partnership  of  Michael  Nisbet  &  Co.,  of  which  David 
C.  Wood  was  a  partner,  had  been  a  partner  in  another  firm, 
trading  under  the  firm  of  Cohen  and  Nisbet;  that  by  the 
terms  agreed  upon  at  the  dissolution  of  the  latter  firm,  he 
was  authorised  to  settle  its  affairs,  and  that  Simpson  was 
indebted  to  the  firm  of  Cohen  and  Nisbet,  to  a  larger  amount 
than  that  which  was  claimed  by  the  plaintiffs  in  this  cause. 
Nisbet,  therefore,  claimed  a  right  to  retain  the  notes  in 
controversy,  alleging  that  he  had  a  lien  upon  them  for  the 
debt  due  by  Simpson  to  the  firm  of  Cohen  &  Nisbet. 

The  defendant  then  produced  and  gave  in  evidence  a 
promissory  note,  dated  the  2nd  of  August,  1825,  at  six 
months,  for  five  hundred  and  twenty-five  dollars  and  seven- 
teen cents,  drawn  by  Henry  Sinipsoji  in  favour  of  Cohen 
&  Nisbet;  another  note  dated  the  nth  of  August,  1825, 
at  six  months,  for  four  hundred  and  three  dollars  and 
twenty  cents,  also  drawn  by  Henry  Simpson  in  favour  of 
Cohen  &  Nisbet,  and  a  third  note  dated  August  13th,  1825, 
at  six  months,  for  four  hundred  and  forty-five  dollars  and 
twenty  cents,  drawn  by  Henry  Simpson  in  favour  of  Cohen 
&  Nisbet.  They  also  gave  in  evidence  a  copy  of  an  ac- 
count current,  dated  13th  March,  1826,  rendered  by  Mich- 
ael Nisbet  &  Co.  to  the  assignees  of  Henry  Simpson,  show- 
ing a  balance  of  two  hundred  and  fifty-three  dollars  and 
fifty-eight  cents,  due  to  the  assignees,  and  a  receipt  for 
that  sum  dated  the  14th  of  March,  1826. 

The  counsel  of  David  C.  Wood,  requested  the  judge 
who  tried  the  cause  in  the  court  below,  to  charge  the  jury, 
"That  if  they  believed  from  the  evidence  that  Nisbet  de- 
tained the  notes  in  controversy  on  behalf  of  Cohen  &  Nis- 
bet, and  not  on  behalf  of  Michael  Nisbet  &  Co.,  then 
David  C.  Wood  is  not  liable,  and  the  jury  ought  not  to 
find  a  verdict  against  him." 

The  counsel  for  the  plaintiffs  below,  requested  the 
judge  to  charge  the  jury  as  follows : 

"i.  That  if  the  promissory  notes  for  which  this  ac- 


NISBET  V.  PATTON  317 

tion  is  brought,  were  placed  in  the  hands  of  the  defend- 
ants as  a  temporary  security  for  moneys  advanced  to  Henry 
Simpson,  until  a  security  in  goods  should  be  delivered,  and 
that  security  was  afterwards  deposited,  the  defendants  had 
no  lien  upon  the  notes  against  Simpson  or  his  assignees  as 
a  security  for  any  claim  of  another  firm  of  which  the  de- 
fendants, or  one  of  them,  were  or  was  a  member. 

"2.  That  if  the  notes  in  question  were  so  delivered  to 
the  defendants  for  a  specific  purpose,  after  that  purpose 
was  complied  with,  the  defendants  are  answerable  in  this 
action  after  demand  and  refusal  by  the  plaintiffs,  and  it  is 
of  no  consequence  to  the  validity  of  the  plaintiffs'  claim 
against  the  defendants,  that  one  of  them  alone  retained  the 
notes  for  a  purpose  in  which  he  alone  was  interested." 

The  judge  instructed  the  jury  as  he  was  requested  by 
the  counsel  for  the  plaintiffs,  and  added,  that  the  action 
being  trover,  the  doctrine  of  set-off  did  not  apply;  but  had 
the  action  been  one  of  contract,  as  the  notes  were  not  due 
when  the  suit  was  brought,  set-off  could  not  be  permitted : 
That  there  being  no  defence  either  by  way  of  lien  or  set- 
off, and  the  defendants  being  copartners  in  business,  and 
having  as  such  received  the  notes  for  a  particular  purpose, 
whenever  that  purpose  was  complied  with,  they  were  bound 
to  surrender  the  notes ;  and  the  circumstance  of  JVood's  not 
taking  an  active  part  in  the  business,  and  not  having  been 
present  when  the  demand  was  made  on  Nisbcf,  and  Nisbct's 
retaining  the  notes  for  the  debt  of  Cohen  &  Nisbet,  did  not 
absolve  Wood  from  liability  in  this  action. 

With  respect  to  the  point  propounded  by  the  counsel 
of  Wood,  his  Honour  said,  that  he  was  unable  to  instruct 
the  jury  as  he  was  requested.  The  law  was  not  so,  but 
just  the  contrary.  The  defendants  being  partners,  and  the 
notes  in  question  having  been  delivered  to  Michael  Nisbet 
for  purposes  connected  with  the  business  of  the  partner- 
ship, the  conversion  of  one,  was,  in  point  of  law,  the  con- 
version of  both. 


318         PARTNER'S   POWER   TO   BIND   COPARTNER 

The  jury  found  a  verdict  for  the  plaintiffs,  and  the 
defendants  sued  out  a  writ  of  error. 

Stroud,  for  the  plaintiffs  in  error,  cited  J^assc  v.  Smith, 
6  Cranch,  226.  2  Phill.  Ev.  125.  IVhite  v.  Demary,  2  New 
Hamp.  Rep.  546.  Bull.  N.  P.  44.  2  Samid.  on  PI.  and 
Ev.  478.     Collier  on  Part.  253. 

Rawle,  Jttnr.  contra,  referred  to  Gozv  on  Partnership, 
52,  79,  174,  175.  Durrell  v.  Mosher,  8  Johns.  Rep.  347.  i 
Maide  &  Selw.  388. 

The  opinion  of  the  court  was  delivered  by 

Gibson,  C.  J. — The  case  of  JJliite  v.  Demary,  2  N.  H. 
Rep.  546,  though  apparently  in  point,  depended  on  a  prin- 
ciple entirely  distinct  from  that  which  governs  the  trans- 
actions of  partners.  There  the  defendants  were  but  joint 
baillees;  and  the  law  is  settled  that  the  act  of  a  tenant  in 
common  shall  not  prejudice  the  title  of  his  co-tenant,  or 
charge  him  with  a  tort.  It  is  otherwise  with  partners,  each 
of  whom  constitutes  the  other  a  general  agent  of  the  firm 
with  power  to  bind  it,  not  only  by  his  contracts,  but  by  his 
acts  in  the  scope  of  the  business.  His  authority  to  contract 
has  never  been  disputed;  and  the  responsibility  of  the  firm 
for  the  legal  consequences  of  his  acts,  stands  on  a  princi- 
ple equally  settled.  Thus,  in  Willett  v.  Chambers,  Cow  p. 
814,  an  attorney  whose  partner  had  received  money  to  be 
laid  out  on  a  mortgage,  was  held  liable  for  it  though  the 
mortgage  was  forged  by  the  receiving  partner  without  the 
knowledge  of  the  other.  The  same  principle  was  held  in 
the  Manufacturers  and  Mechanics  Bank  v.  Gore,  15  Mass. 
Rep.  75,  and  Boardman  v.  Gore,  Id.  331  ;  and  it  has  been 
decided  in  Biggs  v.  Lawrence,  3  T.  R.  454,  that  a  trading 
on  joint  account  in  contraband  goods,  will  implicate  an 
innocent  partner.  So  in  Had  field  v.  Jameson,  2  Munf.  65, 
it  was  determined  that  the  fraud  and  misconduct  of  one 
part  owner  which  produced  the  loss  of  a  ship  and  cargo, 
affected  the  claim  of  both  to  freight  under  a  charter  party. 
It  is,  however,   conceded  that  both  would  have  been  an- 


NISBET  V.  PATTOX  319 

swerable  here  for  the  act  of  Nisbet  in  an  action  on  the  con- 
tract to  redehver  the  notes  after  the  purposes  of  the  de- 
posit were  satisfied;  and  this  concession  includes  the  deci- 
sive fact,  that  the  refusal  of  Nisbet  was  the  refusal  of  his 
co-partner.  Being  so  for  any  purpose,  it  must  be  so  for 
every  purpose ;  for  it  is  not  easy  to  see  why  it  should  be 
his  act  to  charge  him  on  a  contract,  and  not  his  act  to  charge 
him  with  a  tort.  It  is  not  doubted  that  partners  may  be 
sued  in  trover  where  they  join  in  the  conversion;  and  do 
they  not  join  wdiere  the  act  of  one  is  the  act  of  all? 

It  can  be  but  of  little  account  to  them  whether  they 
are  made  to  respond  in  the  one  sort  of  action  or  the  other; 
for  though  it  be  true  that  there  is  no  contribution  between 
tort  feasors,  it  is  equally  true  that  a  partner  may  be  made 
answerable  to  the  firm  for  misconduct  in  involving  it  in 
responsibility.  It  is  said  indeed  that  trover  to  recover  dam- 
ages for  a  destruction  of  the  joint  property,  is  the  only 
action  founded  in  tort  that  can  be  maintained  between  part- 
ners. That  would  seem,  however,  to  have  been  asserted 
without  sufficient  consideration;  for  it  is  not  easy  to  see 
why  a  partner  should  not  be  answerable  to  the  firm,  as  in 
any  other  case  of  principal  and  agent,  for  gross  and  wil- 
ful misfeasance.  In  Had  field  v.  Jameson,  it  was  taken  for 
granted,  that  the  delinquent  partner  was  liable  to  the  other 
for  the  loss  of  the  ship;  but  certainly  not  in  trover,  for  his 
acts  were  evidence  of  anything  but  conversion.  The  act 
then  of  Nisbet,  being  prima  facie  the  act  of  his  partner, 
was  evidence  of  a  joint  conversion,  subject  however  to  be 
rebutted  by  proof,  if  such  there  were,  that  the  latter  had 
openly  disclaimed  the  act  at  the  time;  and  the  direction 
was  in  all  respects  essentially  right. 

Judgment  affirmed.^ 


^Sce:  Kuhn  v.  Weil,  72,  Mo.  213,  1880.  (A  and  B  were  partners. 
A  without  the  knowledge  or  consent  of  B  began  a  suit  in  the  name 
of  the  firm  against  C  for  a  partnership  debt,  and  attached  the  goods 
•of  D.     Held,  that  B  was  liable  to  D  for  the  wrongful  seizure,  as  a 


320         PARTNER'S   POWER   TO   BIND   COPARTNER 

result  of  the  partnership  relation  between  A  and  B.  Accord:  Vander- 
burgh V.  Bassett,  4  Minn.  242,  860 ;  Cunningham  v.  Woodbridge,  76 
Ga.,  302,  1886;  Lockwood  v.  Bartlett,  7  N.  Y.  Supp.  481,  1889;  Hobbs  v. 
Chicago  Packing  Company,  98  Ga.  576,  1896.  But  see:  Chambers 
V.  Clearwater,  i  Keyes  (N.  Y.)  310,  1864.  (A  statute  provided 
that  "no  Judge  of  any  court  can  sit  as  such  in  any  case  in  which 
he  *  *  *  would  be  excluded  from  being  a  juror  by  reason  of 
consanguinity  or  affinity  to  either  of  the  parties."  B  was  a  justice  of 
the  peace  and  a  cousin  of  C.  C  and  D  were  partners.  E  mortgaged 
his  horses  and  wagon  to  A  to  secure  a  debt,  A  having  the  right  to 
take  possession.  He  did  not  exercise  this  right.  C  and  D  recovered 
a  judgment  against  E  before  B,  and  the  horses  and  wagon  were 
seized  on  the  execution.  C  and  D  were  active  in  bringing  the  suit, 
but  C  alone  directed  the  execution.  A  brought  an  action  in  the 
nature  of  trover  against  C  and  D.)  Held,  that  the  above  recited  stat- 
ute made  the  execution  void,  and  the  judgment  for  the  plaintiff 
should  be  affirmed.  Note,  however,  the  reasons  for  holding  D  liable 
given  by  Denio,  Ch.  J. 

"The  defendants  were  both  active  in  obtaining  the  judgment 
against  Roosa,  and  although  Clearwater  alone  gave  the  directions  for 
seizing  the  horses  and  wagon,  he  should  be  presumed,  in  the  absence 
of  evidence  to  the  contrary,  to  have  been  acting  in  conjunction  with 
the  other  defendant  in  a  common  enterprise  of  collecting  their  joint 
debt  by  a  seizure  of  the  property  in  question.  Although  the  com- 
mission of  a  trespass  was  not  within  the  scope  of  the  partnership 
enterprise,  the  collection  of  the  joint  debt  was  a  part  of  that  busi- 
ness. The  direction  to  levy  the  execution  upon  a  particular  subject 
was  an  incident  to  the  obtaining  payment  of  the  debt  by  legal  pro- 
cess, and  when  one  of  the  partners  was  found  acting  in  that  under- 
taking, the  presumption  is  that  he  had  the  countenance  and  assent 
of  the  other  partner." 


HAWKINS  r.  APPLEBY  321 


HAWKINS  V.  APPLEBY. 
In  the  Superior  Court  of  New  York,  1849. 

2  Sandford's  New  York  Superior  Court  Reports,  421. 

This  was  an  action  of  trespass  on  the  case.  The  dec- 
laration set  forth  that,  in  the  month  of  March,  1847,  the 
defendants  apphed  to  the  plaintiffs  to  purchase  from  them 
a  quantity  of  tobacco,  and  offered  in  payment  a  promis- 
sory note  of  Barstow  Emanuel  &  Co.,  dated  New  York, 
Januar}^  15,  1847,  ^o^*  ^^e  sum  of  $274.80,  payable  in  six 
months;  that  the  defendants  represented  the  note  to  be  good, 
and  the  makers  in  good  credit,  and  that  the  plaintiffs  re- 
lying upon  the  representations  so  made,  sold  and  delivered 
to  the  defendants  a  quantity  of  tobacco,  and  took  the  note 
in  payment.  In  the  second  count  of  their  declaration,  the 
plaintiffs  averred  that  the  defendants  represented  the  note 
to  be  a  good  note,  and  that  "it  zvoiild  pass  in  Soiithstreet." 
The  declaration  further  alleged  that,  Barstow  Emanuel  & 
Co.,  at  the  time  of  the  transfer  of  the  note  to  the  plain- 
tiffs, were  wholly  insolvent,  and  that  the  defendants,  know- 
ing such  to  be  the  fact,  fraudulently  made  the  purchase  as 
set  forth.     The  defendants  pleaded  the  general  issue. 

A  verdict  was  taken  in  favor  of  the  plaintiffs  for 
$289.94,  subject  to  the  opinion  of  the  court,  on  a  case  to 
be  made,  and  subject  to  such  modification  or  adjustment 
of  the  verdict  as  the  court  might  deem  proper,  with  leave 
to  the  defendants  to  move  for  a  nonsuit.^ 

E.  IV.  Stoughton,  for  the  defendants. 

III.  There  is  no  proof  that  Moore  knew  of,  or  sanc- 
tioned, the  representation  alleged  to  have  been  made  by 
Appleby ;  nor  was  he  really  interested  in  the  note :  this  was 


'  The  statement  of  facts  as  given  by  the  Reporter  is  abbreviated. 


322         PARTNER'S   POWER  TO   BIND   COPARTNER 

known  to  Hawkins.  A  fraudulent  representation  by  one 
l^artner,  will  not  bind  or  affect  the  other,  in  this  action. 
{Pierce  v.  Jackson,  6  Miss.  R.  242 ;  Sherzvood  v.  Marivick, 

5  Greenleaf  R.  295.) 

If  the  suit  was  directly  upon  the  contract  of  warranty 
made  by  one  of  the  partners,  the  rule  would  be  otherwise. 
So  also,  the  plaintiffs  could  have  brought  trover  or  re- 
plevin for  the  tobacco,  at  least  after  demand  made  there- 
for; as,  in  such  case,  retaining  possession  would  be  deemed 
the  fraud  of  both  defendants.- 

Sandford,  J. :  The  other  alleged  variance  depends 
upon  the  principal  question  in  the  cause,  the  liability  of 
Moore  in  respect  of  the  fraud  of  his  partner  Appleby. 

It  has  long  been  established,  that  a  partner  is  liable  in 
assumpsit  for  the  consequences  of  frauds  practised  by  his 
copartner,  in  the  transaction  of  their  business,  of  which 
he  was  entirely  ignorant,  and  although  he  derived  no  bene- 
fit from  the  fraud.  (Collyer  on  Part.  240;  Story  on  Part. 
§  108.)  This  is  upon  the  ground,  that  by  forming  the 
connexion,  partners  publish  to  the  world  their  confidence 
in  each  other's  integrity  and  good  faith,  and  impliedly 
agree  to  be  responsible  for  what  they  shall  respectively  do 
within  the  scope  of  their  partnership  business;  and  if  by 
the  wrongful  act  of  one,  a  loss  must  fall  upon  a  stranger, 
or  upon  the  other  partner  who  is  equally  innocent,  the  lat- 
ter having  been  the  cause  or  occasion  of  the  confidence 
reposed  in  his  delinquent  associate,  must  suffer  the  loss. 

Several  striking  applications  of  this  principle,  are  to 
be  found  among  the  adjudged  cases;  of  which  we  will  re- 
fer to  Rapp  V.  Latham,  i  Barn.  &  Aid.  795 ;  Stone  v.  Marsh, 

6  B.  &  Cr.  551;  Hume  v.  Bolland,  Ryan  &  M.  371;  and 
Boardman  v.  Gore,   15  Mass.  331.) 

It  is  perfectly  clear,  that  if  the  plaintiffs  had  wholly 


"  Only  so  much  of  the  Reporter's  notes  of  the  arguments  of 
counsel,  and  the  opinion  of  the  Court  as  relates  to  this  question  is 
reprinted. 


HAWKIXS  z:  APPLEBY  323 

disaffirmed  the  sale,  and  sued  Appleby  and  Moore  in  as- 
sumpsit for  the  price  of  the  tobacco,  they  would  have  been 
entitled  to  recover.  Is  the  rule  different  in  an  action  to 
recover  damages  for  the  deceit  practiced  upon  them?  The 
difference  in  theory  is,  that  in  assumpsit  the  innocent  parrt- 
ner  is  charged  with  the  purchase  of  goods;  while  in  the 
action  of  tort,  he  is  accused  of  a  fraud  of  which  he  per- 
sonally is  innocent.  In  practical  effect,  the  only  difference 
is,  that  in  the  one  case  the  plaintiff  alleges  a  sale  and  proves 
a  fraud ;  in  the  other,  he  both  alleges  and  proves  the  fraud- 
ulent transaction.  In  both  forms  of  action,  the  innocent 
partner  is  subjected  to  liability,  on  the  principle  that  he  has 
held  out  his  associate  to  be  worthy  of  confidence,  in  their 
copartnership  dealings.  The  difference  in  the  ulterior  rem- 
edy, after  judgment,  cannot  have  any  effect  upon  the  pro- 
priety of  the  form  of  action.^ 


^Compare:  Townsend  v.  Bogart,  ii  Abb.  Pr.  (N.  Y.)  355,  i860. 
(Under  the  Code,  where  debts  are  sued  on  civilly,  the  plaintiff  could 
begin  by  an  arrest  "when  the  defendant  has  been  guilty  of  fraud." 
A  and  B  were  partners.  A,  without  the  knowledge  of  B,  by  fraud 
induced  C  to  sell  goods  to  the  partnership.  C  brought  an  action  on 
the  case  for  the  deceit  against  A  and  B.  Held,  that  before  the  code 
B  was  liable  for  the  deceit,  and  that  after  the  code  B  could  be  pro- 
ceeded against  by  arrest.) 

Stewart  v.  Levy,  36  Cal.  159,  1868.  (A  and  B  were  partners.  A  by 
fraudulent  representations  induced  C  to  sell  certain  goods  to  the 
partnership.  C  sued  A  and  B  for  damages  on  account  of  the  fraud, 
obtained  a  judgment,  and  the  Court  ordered  execution  to  issue  against 
the  bodies  of  the  defendants.  In  the  course  of  the  trial  B  asked 
the  Court  to  charge  that,  "If  the  jury  shall  find  from  the  evidence 
that  the  fraud,  if  any,  was  committed  by  the  defendant  [A]  and  not 
by  the  defendant  [B]  they  must  acquit  the  defendant  [B]  of  the 
charge  of  fraud,"  p.  165.  The  Court  refused  to  so  charge.  Held 
error,  on  the  ground  that,  because  though,  "All  the  partners  will  be 
bound  by  the  fraud  of  one  of  the  partners  in  contracts  relating  to  the 
partnership,"  and,  "all  are  responsible  for  the  injury  occasioned  by  the 
fraud,  and  arc  liable  to  an  action  brought  on  the  contract,  or  for  the 
recovery  of  property  fraudulently  obtained,"  they  are  not  liable  in  this 
case  because  "the  fraud  upon  which  the  judgment  proceeds  is  actual, 
intentional  fraud,  and  implies  moral  turpitude."    pp.  165,  166). 

Cooper  T'.  Prichard,  48  Law  Times  848,  1883.  (A  and  B  were 
partners  in  the  business  of  solicitors,  and  it  was  part  of  the  business 
of  the  firm  to  receive  money  for  investment.  A.  acting  for  the 
firm,  received  money  from  C  to  invest  and  misappropriated  it.  B 
was  not  a  party  to  the  fraud.  A  and  B  became  bankrupts  and  re- 
ceived their  discharge.  C  sued  B  for  the  money  lost  through  .A.'s  act. 
B  pleaded  his  discharge.    Judgment  for  C.    Appeal.    The  English  Bank- 


324         PARTxNER'S   POWER   TO   BIND   COPARTNER 

It  is  laid  down  in  a  respectable  treatise  on  the  subject  • 
of  parties  to  actions  at  law,  that  where  one  takes  property 
for  the  use  of  another,  the  latter  may  adopt  the  act;  and 
he  is  thereby  placed  in  the  situation  of  one  who  had  pre- 
viously commanded  the  taking,  and  becomes  a  trespasser 
if  the  act  were  unlawful.  (Hammond  on  Part.  84.)  Now 
in  this  case,  Appleby  obtained  the  tobacco  for  the  use  of 
himself  and  Moore.  Moore  adopted  the  act  by  receiving 
and  participating  in  the  use  of  the  property.  He  was  thus 
placed  in  the  same  situation,  in  reference  to  the  rights  of 
the  plaintiffs,  as  if  he  had  directed  Appleby  to  procure  the 
property,  or  had  concurred  with  him  in  the  transaction; 
and  on  the  authority  cited,  he  became  a  wrong  doer.  There 
is  the  additional  circumstances  in  this  case,  that  the  plain- 
tiffs immediately  on  discovering  the  fraud,  and  within  a 
fortnight  after  the  exchange,  notified  the  defendants  in 
writing,  that  they  had  ascertained  the  note  to  be  bad,  and 
that  they  should  hold  the  defendants  liable  for  the  tobacco. 

The  omission  of  Moore  to  repudiate  or  disaffirm,  on 
this  occasion,  what  his  partner  had  done,  must  be  regarded 
as  a  distinct  adoption  and  ratification  of  the  act;  and  we 
think  he  ought  to  be  deemed  from  thenceforth  a  joint 
wrong  doer  with  Appleby.^ 

ruptcy  Act,  of  1869,  provided  that  "an  order  of  discharge  shall  not 
release  the  bankrupt  from  any  debt  or  liability  incurred  by  means 
of  any  fraud  or  breach  of  trust."  Brett,  M.  R.,  with  whom  con- 
curred Lindley.  and  Fry,  L.  JJ.,  believed  that  had  the  Act  read 
"incurred  by  means  of  his  fraud"  B  could  have  pleaded  his  discharge. 
Our  Bankruptcy  Act  of  1898  provides,  Section  17,  that  a  discharge 
shall  release  a  bankrupt  from  all  his  proveable  debts  except  such  as 
(2)  "are  liabilitcs  for  obtaining  property  by  false  pretences  or  false 
representations ;"  or,  (4)  "were  created  by  his  fraud,  embezzlement, 
misappropriation,  or  defalcation  while  acting  as  an  officer  or  in  any 
fiduciary  capacity.") 

*  On  the  question  of  the  ratification  of  torts  by  copartners  see: 
United  States  v.  Baxter,  46  Fed.  350,  1891.  (A  and  B  were  part- 
ners in  the  lumber  business.  They  trespassed  on  lands  of  the  United 
States,  cutting  timber.  The  United  States  brought  an  action  for 
damages.  If  the  trespass  was  wilful,  punitive  damages  could  be 
recovered.  B  pleaded  that  he  was  ignorant  of  the  fact  that  he  was 
committing  a  trespass,  though  in  the  case  of  A  the  trespass  was  wil- 
ful. Held,  that  though  B  might  have  been  ignorant  at  the  time, 
by  retaining  the  fruits  of  the  wrongful  act  after  being  notified  of 
its  character  he  made  himself  liable  as  if  the  act  of  cutting  had  been 
a  wilful  tort.) 


GILBERT  V.  EMMONS  325 


GILBERT  V.  EMMONS. 
In  the  Supreme  Court  of  Illinois,  1866. 

42  Illinois  Reports,   143. 

This  was  an  action  of  trespass  on  the  case,  brought 
in  the  court  below  by  Strew  M.  Emmons  against  Frank  S. 
Palmer  and  William  Gilbert,  for  malicious  prosecution  of 
the  plaintiff,  upon  a  charge  of  larceny. 

A  trial  resulted  in  a  verdict  for  the  plaintiff  for  $5,000 
damages;  Palmer  having  died  after  the  verdict  was  ren- 
dered, a  judgment  was  entered  against  Gilbert,  from  which 
he  took  this  appeal.  So  much  of  the  pleadings  and  facts 
in  the  case  as  are  necessary  for  an  understanding  of  the 
questions  decided,  will  be  found  in  the  opinion  of  the  court. 

Lawrence,  J. :  Judgment  must  be  reversed  on  account 
of  the  error  in  giving  the  sixth  instruction  for  the  plaintiff, 
which  was  as  follows  : 

"If  the  jury  believe,  from  the  evidence,  that  the  de- 
fendants, or  either  of  them,  with  the  knowledge  and  con- 
sent of  the  other,  caused  a  warrant  to  be  sued  out  for  lar- 
ceny against  the  plaintiff,  and  thereby  occasioned  the  arrest 
and  imprisonment  of  the  plaintiff;  and  if  the  jury  further 
believe,  from  the  evidence,  that  said  warrant  was  mali- 
ciously obtained  by  the  said  defendants,  or  either  of  them. 
with  the  knowledge  and  consent  of  the  other,  and  without 
probable  cause,  then  the  plaintiff  is  entitled  to  recover  dam- 
ages, and  the  jury  may  allow  the  plaintiff  such  damages 
as,  from  the  evidence,  they  believe  to  be  just  and  right 
under  all  the  circumstances  of  the  case,  not  exceeding  the 
damages  laid  in  the  declaration." 

The  defendants  in  this  case  were  partners,  and  the 
money  said  to  have  been  stolen  seems  to  have  been  the 
money  of  the  firm.     But  Gilbert,  the  plaintiff  in  error,  had 


326         PARTNER'S   POWER   TO   BIND   COPARTNER 

no  personal  knowledge  of  the  circumstances  under  which 
the  money  was  taken,  nor  does  it  appear  that  he  had  any 
direct  personal  agency  in  causing  the  arrest.  The  affidavit 
upon  which  the  warrant  was  issued  was  made  by  Palmer, 
and  he  directed  the  officer  in  its  execution.  The  declara- 
tion avers  that  he  acted  "with  the  advice  and  consent  and 
at  the  instigation  of  the  defendant,  Gilbert."  Although 
Gilbert  may  not  have  directly  caused  the  arrest,  yet,  if  he 
advised  it,  as  averred  in  the  declaration,  he  would  be 
equally  responsible  with  Palmer.  And  that  he  did  so  advise 
need  not  be  directly  proven.  The  jury  would  have  the 
right  to  infer  it,  if  circumstances  were  proven  justifying 
such  an  inference.  Whether  such  facts  were  proven, 
is  a  question  upon  which  we  express  no  opinion,  as 
the  case  must  go  before  another  jury.  But  that 
Gilbert  is  not  liable  unless  he  either  directly  partici- 
pated in  causing  the  arrest,  or  advised  it  to  be  made,  is 
clear.  The  mere  "knowledge  and  consent,"  on  his  part,  that 
Palmer  should  have  the  arrest  made,  would  not,  as  stated 
in  the  instruction,  make  him  liable.  Such  an  act,  even  if 
done  with'  his  knowledge  and  consent,  was  not  within  the 
scope  of  their  partnership.  A  mere  passive  assent  on  his 
part,  that  Palmer  might  take  such  steps  as  he  thought  proper 
for  the  recovery  of  the  money,  or  for  the  punishment  of  the 
person  supposed  to  have  taken  it,  would  not  render  him 
liable.  This  would  be  merely  a  consent  that  Palmer  might 
incur  such  personal  liabilities  as,  from  his  knowledge  of  the 
facts,  he  should  think  just  and  expedient. 

But  one  person  cannot  be  made  liable  in  damages  be- 
cause he  knows  that  another  person  is  about  to  commit  an 
unlawful  act,  even  though  he  fails  to  protest  against  it, 
and,  therefore,  in  the  ordinary  use  of  language,  may  be 
said  to  have  consented  to  it.  In  this  sense  a  jury  would 
probably  understand  this  instruction.  But  something  fur- 
ther would  be  necessary  in  order  to  make  Gilbert  liable. 
It  would  be  necessary  that  his  "consent"  should  be  of  so 
active  and  positive  a  character  as  to  amount  to  advice  and 


GILBERT  V.  EMMONS  3_V 

co-operation.  In  many  cases  the  use  of  one  of  these  words 
in  place  of  the  other,  might  not  mislead  a  jury,  but,  in  the 
record  before  us,  the  merits  of  the  controversy  turn  to  a 
large  extent  upon  the  difiference  between  these  terms.  Did 
he  merely  leave  Palmer  free  to  follow  the  dictates  of  his 
own  judgment,  without  interference  on  his  part,  which 
would  be  a  species  of  consent,  but  not  such  as  to  make 
Gilbert  liable  ?  or  did  he  advise  and  encourage  the  arrest,  as 
averred  in  the  declaration,  and  thus  jointly  with  Palmer 
assume  its  liabilities?  On  another  trial,  this  instruction 
should  be  modified.  The  judgment  is  reversed  and  the 
cause  remanded.^ 

Judgment  reversed.^ 


*  The  parts  of  the  opinion  which  relate  to  matters  not  raised  by 
the  sixth  instruction  are  omitted. 

Accord:  Marks  v.  Hastings,  loi  Ala.  165,  1892;  Kirk  v.  Garrett, 
84  Md.  383,  1896;  Martin  v.  Simkins,  116  Ga.  254,  1902.  See  also  the 
earlier  case  in  the  House  of  Lords,  on  appeal  from  the  Scottish 
Courts,  Arbuckle  v.  Taylor,  3  Dow,   160,   1815. 


328         PARTNER'S   POWER   TO   BIND   COPARTNER 


BREWING  z'.  BERRYMAN. 
In  the  Supreme  Court  of  New  Brunswick,  1875. 

15  Nezv  Bnoiszi^ick  (2  Piigslcy's)  Reports,  515. 

Trespass  on  the  case.  In  Nov.  1868,  Elisha  Broad 
having  the  equity  of  redemption  in  the  building  in  which 
plaintiff's  rooms  were,  and  being  in  possession  ver- 
bally agreed  with  the  plaintiff  to  let  him  have  two 
rooms  and  also  the  use  of  steam  power  to  drive 
certain  machineiy,  of  the  plaintiff,  who  was  engaged 
in  the  business  of  sash  and  blind  maker,  for  a  term  of 
three  years  from  the  ist  of  May  following,  at  a  rent  of 
f6o  per  annum.  Under  this  agreement  the  plaintiff",  who 
was  then  in  the  premises,  continued  in  possession  after  the 
1st  of  May.  Subsequent  to  the  agreement,  on  the  iSth 
January,  1869,  Broad  being  indebted  to  one  Wm.  Peters, 
who  at  the  time  of  the  agreement  was  mortgagee  of  the 
premises,  made  to  him  an  absolute  conveyance  of  all  his 
right,  title  and  interest  in  the  property.  On  the  9th  Aug- 
ust, 1 87 1,  Peters  conveyed  to  the  defendants,  who  also  took 
a  quit-claim  deed  from  Broad.  The  defendants,  all  of 
whom  had  separate  businesses  of  their  own,  were  engaged, 
along  with  one  Levi  H.  Young,  as  co-partners  in  the  manu- 
facture of  bolts  and  screws,  which  they  carried  on  in  the 
factory  in  which  were  the  rooms  leased  to  plaintiff*,  under 
the  name  of  "The  New  Brunswick  Bolt  Works  Company.'' 
In  August  1871,  after  the  defendants  had  become  the  own- 
ers of  the  factory.  Young,  and  the  foreman  of  the  com- 
pany, entered  upon  the  portion  of  the  premises  occupied 
by  the  plaintiff,  and  without  his  permission,  tore  down  a 
chimney,  in  consequence  of  which,  injury  was  done  to  lum- 
ber, blinds  and  other  property  of  the  plaintiff.     *     *     * 

It  was   shewn  that   the   chimney   was   torn  down  by 


BREWING  V.  BERRYMAN  329 

Young  for  the  purpose  of  effecting  improvements  on  the 
defendants'  property  for  the  purposes  of  the  Boh  Works, 
and  also  that  the  bricks  were  appropriated  and  used  by 
the  company,  though  the  defendant,  John  Berryman,  liad 
no  personal  knowledge  of  this  fact.  It  was  also  shewn 
that  he  had  never  personally  interfered  in  the  manage- 
ment of  the  company's  business.  Campbell  G.  Berryman 
also  said  he  gave  no  authority  to  Young  to  tear  down  the 
chimney,  particularly  in  the  manner  he  did,  which  was 
admitted  to  have  been  quite  unjustifiable.  His  Honor  di- 
rected the  jury  that  they  might  take  into  consideration  the 
circumstances  under  which  the  act  was  done,  and  could,  if 
they  thought  proper  to  do  so,  give  exemplary  damages. 

The  Jury  gave  the  plaintiff  $750  damages,  which  was 
very  much  beyond  the  actual  injury  done. 

Rule  Nisi  for  a  new  trial  granted.^ 

Ritchie,  C.  J.  One  question  raised  in  this  case  is, 
whether  the  defendant,  John  Berryman,  can  be  liable  for 
the  amount  of  damages  found — he  not  having  personally 
taken  any  part  in  the  wrongful  act  committed  by  the  other 
defendant.  But  does  any  such  question  really  arise  here 
as  to  the  proper  measure  of  damages,  where  one  co-tres- 
passer has  acted  from  improper  motives,  in  which  the 
other  has  not  participated,  or  as  to  how  the  damages  ought 
to  be  assessed  in  reference  to  the  acts  and  motives  of  the 
most  guilty,  or  the  most  innocent  party  ?  It  being  assumed, 
as  it  must  now  be,  that  the  defendants  were  both  liable  for 
the  act  complained  of,  viz.,  the  pulling  down  the  plaintiff's 
chimney,  and  the  injury  to  his  property,  they  must  bolh 
necessarily  be  liable  for  the  manner  in  which  it  was  done. 
There  were  no  distinct  or  unconnected  acts  of  one  or  other 
of  the  defendants,  to  make  one  or  other  more  culpable,  so 
far  as  the  plaintiff  was  concerned.  What  he  complains  of 
is,   that  being  in  the   lawful   and   quiet   occupation  of   his 


'  The    Reporter's    statement    of    the    facts    is    abbreviated    and   his 
notes  of  the  arguments  of  counsel  are  omitted. 


330         PARTNER'S   POWER  TO   BIND   COPARTNER 

tenement,  and  in  the  peaceable  prosecution  of  his  business, 
his  property  was  invaded,  and  his  business  interfered  with, 
and,  as  he  alleges,  destroyed.  The  wrong  thus  complained 
of  was  found  to  be  the  joint  and  several  tort  of  both  the 
defendants,  done  by  one  for  their  joint  benefit,  and  in 
which  benefit  both  clearly  participated.  Is  there  anything 
in  the  case  that  would  justify  the  jury  in  discriminating 
(if  they  had  the  right  to  do  so,)  between  the  liability  of 
the  defendants?  If  the  plaintiff  is  entitled  to  recover  for 
the  wrong,  why  should  not  the  full  amount  he  is  entitled 
to  be  borne  equally  by  both  defendants? 

This  case  is  widely  dififerent  from  that  of  two  co- 
trespassers,  each  making  himself  liable  by  his  own  acts 
and  conduct.  Here  the  defendant,  John  Beri-yman,  is  lia- 
ble, not  because  he  individually  and  personally  did  any 
tortious  acts,  but  because  the  law  holds  him  responsible 
for  the  wrongful  acts  of  his  co-partner,  the  other  defend- 
ant, in  a  matter  connected  with  the  partnership  business : 
in  other  words,  he  committed  the  tort  by  his  servant,  agent 
and  partner,  and  therefore  is  equally  liable  with  the  person 
for  whose  acts  the  law  thus  holds  him  responsible;  and 
therefore,  in  this  case,  the  plaintiff  is  entitled  to  recover 
from  both  defendants  the  damages  for  the  whole  injury  he 
has  sustained  from  the  joint  act  of  trespass.^ 
Rule  discharged. 


^  The  Court's  discussion  of  the  alleged  excessive  nature  of  the 
damages  given,  admitting  that  exemplary  damages  could  be  recovered 
against  Berryman,  is  omitted. 

'Compare:  Grund  v.  Van  Vleck,  69  111.  478,  1873.  (B  and  C 
were  apparently  real  estate  agents.  They  rented  the  property  in 
Chicago,  of  D,  a  resident  of  New  York,  to  A.  While  C  was  in  the 
East,  B,  without  the  knowledge  of  either  C  or  D,  claiming  that  A 
was  in  default  in  payment  of  rent,  caused  E  to  make  a  distress,  and 
afterwards  evicted  A.  A  brought  an  action  of  trespass  against  B, 
C,  and  D.  Held,  that  there  was  no  evidence  to  justify  a  verdict 
against  C  or  D.  As  to  C  the  Court  said :  "One  partner  has  no  right 
to  involve  another,  unless  in  the  ordinary  course  of  their  business; 
nor,  for  instance,  in  a  trespass,  except  in  a  case  where  the  trespass 
is  in  the  nature  of  a  taking  which  is  available  to  the  partnership, 
and  in  such  case,  to  render  one  partner  liable  who  did  not  join  in 
the   commission   of  the   trespass  he   must   afterwards  have   concurred 


i 


BREWING  V.  BERRYMAN  331 

in  and  received  the  benefit  of  it."  Citing  Petrie  v.  Lament,  I  Car.  & 
M.  93,  1841.  In  that  case  Tindall,  C.  J.,  said,  p.  96,  that  the  other 
partners  would  be  liable  if  the  trespass  "is  in  the  nature  of  a  taking, 
which  is  available  to  the  partnership,  more  especially  [Italics  oursj 
if  the  other  partners  afterwards  agree  and  consent  to  it.") 

Titcomb  v.  Lydia,  57  111.  App.  296,  1894.  (B  and  C  were  part- 
ners. They  had  a  chattel  mortgage  on  certain  property  of  A.  A, 
being  in  default,  B  and  C  had  a  right  to  take  possession  of  the  goods 
provided  they  could  do  so  peacefully.  B,  without  the  knowledge 'of 
C,  took  the  goods  by  violence,  assaulting  A.  A  sued  B  and  C  in 
trespass.     Held,   that    C   was   not   liable.) 


332         PARTNER'S   POWER   TO   BIND   COPARTNER 


McILROY  V.  ADAMS. 
In  the  Supreme  Court  of  Arkansas,  1877. 

2,2  Arkansas  Reports,   315. 

Harrison,  J. :  This  was  an  action  by  Adams  &  Bro., 
against  Denton  D.  Stark  and  William  Mcllroy,  for  the 
malicious  prosecution,  without  probable  cause,  of  an  action 
against  them. 

The  averments  of  the  complaint  were:  That  the 
plaintiffs,  on  the  8th  of  September,  1873,  executed  to  J.  C. 
Pendleton,  a  note  for  $1032,  payable  ninety  days  there- 
after, and  that  Pendleton,  indorsed  the  note  in  blank,  and 
the  same  was  before  maturity  delivered  to  the  defendants, 
who  were  partners  and  bankers  under  the  firm  name  of 
D.  D.  Stark  &  Co.,  in  Fayetteville,  for  collection.  Pendle- 
ton not  parting  with  his  interest,  and  remaining  the  owner 
thereof. 

That  the  defendants  after  the  note  fell  due,  falsely 
and  fraudulently  represented,  that  they  were  the  owners 
of  the  note,  and  had  purchased  the  same  for  a  valuable 
consideration  before  maturity,  and  brought  suit  thereon  in 
their  own  names  against  the  plaintiffs  in  the  Washington 
Circuit  Court,  and  recovered  judgment  by  default;  that 
the  plaintiffs  had  a  good  and  valid  defense  against  the 
note,  which  the  defendants  knew  when  they  brought  their 
suit,  but  the  plaintiffs  were  deceived  by  the  representations 
of  the  defendants,  and  supposed  that  they  were  the  owners 
of  the  note  and  had  acquired  it  by  purchase  before  its  ma- 
turity, and  did  not  know  any  better  until  after  the  judg- 
ment had  been  obtained :  That  the  defendants  sued  out 
execution  on  the  judgment,  and  the  same  was  by  their  di- 
rection levied  in  the  plaintiffs'  stock  of  drugs  and  medi- 
cines, they  being  druggists,  which  w^ere  seized  and  taken 


McILROY  V.  ADA^IS  333 

and  their  store  closed;  and  that  their  stock  of  drugs  and 
medicines  were  detained  from  them  five  months,  and  they 
were  dispossessed  of  their  store  thirty  days : 

That  after  the  levy  of  the  execution  the  plaintiffs  filed 
their  complaint  in  equity  in  said  court  against  the  defend- 
ants, for  an  injunction  against  the  judgment,  and  upon 
the  hearing  of  the  cause,  it  was  by  the  decree  of  the  court 
perpetually  enjoined. 

And  that  whilst  the  said  goods  were  in  the  custody 
of  the  sheriff  they  were  damaged  and  reduced  in  value 
$1000,  and  by  the  seizure  of  their  stock,  and  the  closing 
of  their  store,  their  credit  was  ruined  and  their  business 
destroyed,  and  they  thereby  sustained  damage  to  the 
amount  of  $4000. 


A  trial  was  had  as  to  Mcllroy. 

The  appellant  read  to  the  jury  the  articles  of  partner- 
ship between  himself  and  Stark,  by  which  it  was  agreed, 
that  they  should  form  a  partnership  by  the  firm  name  of 
Denton  D.  Stark  &  Co..  "in  the  buying  and  selling  of  ex- 
change, gold,  silver,  bonds  and  whatsoever  to  the  said 
business  belongs,"  to  which  Stark  was  to  give  his  entire 
attention ;  and  he  testified  that  the  partnership  was  strictly 
confined  to  the  business  of  banking,  and  it  had  no  author- 
ity from  him  to  engage  in  anything  which  did  not  apper- 
tain to  that ;  that  he  had  nothing  whatever  to  do  with  the 
management  or  control  of  the  business,  and  the  same  was 
attended  to  and  conducted  solely  by  Stark.  That  the  pur- 
chase of  notes  was  no  part  of  the  business  of  the  firm,  and 
if  Stark  claimed  the  note  as  the  property  of  the  firm,  it 
was  without  authority  from  him;  that  he  had  no  knowl- 
edge of  the  note,  nor  of  the  suit  and  the  proceedings  to 
collect  the  note  during  their  pendency,  and  they  were  un- 
authorized by  him. 

He  asked,  with  others,  the  following  instructions 
which  the  court  refused  to  give,  viz. : 


334         PARTNER'S   POWER   TO   BIND   COPARTNER 

Fourth — The  obtaining  of  money,  or  the  attempt  to 
obtain  money  by  fraud  for  the  use  of  a  firm,  does  not 
render  the  partners  liable  as  such,  without  their  participa- 
tion in  or  consent  to  the  fraud. 

Tzvelfth — Unless  Mcllroy  individually  participated  in 
falsely  and  fraudulently  procuring  the  judgment  against 
the  plaintiffs,  and  causing  the  alleged  wrongs  to  be  com- 
mitted, the  verdict  should  be  for  him. 

Fifteenth — The  plaintiff  cannot  recover  against  Mc- 
llroy, unless  it  be  proven  that  the  defendants  fraudulently 
prosecuted  the  action  to  judgment,  knov/ing  that  they  had 
no  right  to  recover,  and  that  Mcllroy  personally  had  such 
knowledge.  [The  instructions  were  refused,  and  a  verdict 
was  returned  for  the  plaintiff  for  $650.] 

The  instructions  were  properly  refused.^  "Partners 
are  liable  in  solido  for  the  tort  of  one,  if  that  tort  were 
committed  by  him  as  a  partner,  and  in  the  course  of  the 
partnership."  Par.  Part.,  150.  And  Judge  Story  says :  "It 
has  been  well  remarked  by  a  learned  writer  that  'although 
the  general  rule  of  law  is  that  no  one  is  liable  upon  any  con- 
tract, except  such  as  are  privy  to  it  yet  this  is  not  contra- 
vened, by  the  liability  of  partners,  as  they  may  be  imagined 
virtually  present  at,  and  sanctioning  the  proceedings  they 
singly  enter  into  in  the  course  of  trade;  or  as  each  vested 
with  a  power  enabling  them  to  act  at  once  as  principals  and 
as  the  authorized  agent  of  their  copartners.'  "  "The  princi- 
ple," he  says,  "extends  further,  so  as  to  bind  the  firm  for 
the  frauds  committed  by  one  partner  in  the  course  of  the 
transaction  and  business  of  the  partnership,  even  when  the 
other  partners  have  not  the  slightest  connection  with,  or 
knowledge  of,  or  participation  in  the  fraud ;  for,  as  has  been 
justly  observed,  by  forming  the  connection  of  partnership 
the  partners  declare  themselves  to  the  world  satisfied  with 
the  good  faith  and  integrity  of  each  other,  and  implicitly 


*  Only  so  much  of  the  opinion  as   relates  to  this  question  is  re- 
printed. 


McILROY  V.  ADAMS  333 

undertake  to  be  responsible  for  what  they  shall  respectively 
do  within  the  scope  of  the  partnership  concerns."  Sto.  Part., 
sec.  104,  108. 

The  Judgment  is  affirmed.^ 


'Accord:  Swenson  v.  Erickson,  90  111.  App.  358,  1899.  (C  owed  the 
firm  of  A  and  B.  B,  without  the  knowledge  or  approval  of  A,  went 
before  a  justice  of  the  peace  and  accused  C  of  fraudulently  concealing 
her  property.  On  B's  affidavit,  under  the  statute  relating  to  the  bringing 
of  civil  actions  by  attachment  in  the  case  of  fraudulent  debtorts,  C's 
goods  were  attached  and  taken  away.  There  was  no  foundation  for  the 
fraud  charged,  and  the  prosecution  of  the  case  was  dropped.  C  sued  A 
and  B  for  malicious  prosecution.  Held,  that  she  could  not  recover 
against  A.  Adams,  J. :  "In  the  present  case  it  was  incumbent  on  defend- 
ant in  error  to  prove  both  want  of  probable  cause  for  suing  out  the  writ 
of  attachment  and  malice.  Now,  while  it  is  true  that  malice  may  be 
inferred  from  want  of  probable  cause,  as  against  the  person  who  acted 
in  the  premises  without  probable  cause,  it  would  be  extremely  unreason- 
able and  unjust  to  indulge  in  such  inference  against  one  who  neither 
advised  nor  co-operated  in,  nor  ratified,  nor  derived  benefit  from  the 
act  done  without  probable  cause.") 


336         PARTNER'S   POWER   TO   BIND   COPARTNER 


ROSENKRANS  v.  BARKER. 
In  the  Supreme  Court  of  Illinois,  1885. 

115  Illinois  Reports,  331. 

Mr.  Justice  Craig  delivered  the  opinion  of  the  Court:* 
This  was  an  action  brought  by  A.  E.  Barker,  in  the 
Superior  Court  of  Cook  county,  against  O.  L.  Rosenkrans 
and  J.  H.  Weber,  to  recover  damages  for  an  alleged  mali- 
cious prosecution  and  false  imprisonment.  A  trial  of  the 
cause  before  a  jury  resulted  in  a  verdict  and  judgment  in 
favor  of  the  plaintiff  for  $2000.  The  defendants  appealed 
to  the  Appellate  Court,  where  the  judgment  was  affirmed. 

The  facts  out  of  which  this  litigation  grew,  so  far  as 
is  necessary  to  state  them,  are  substantially  as  follows :  In 
18S2  Barker  resided  in  Iowa,  and  was  engaged,  in  a  small 
way,  in  the  jewelry  business.  In  the  latter  part  of  the 
year  he  bought  a  bill  of  goods  of  Rosenkrans  &  Weber, 
of  Chicago,  amounting  to  $350.  The  goods  were  sold  by 
a  traveling  man  named  Johnson,  \\nien  the  bill  became 
due,  $100  was  paid,  but  no  part  of  the  balance  has  ever 
been  paid.  Rosenkrans  resided  in  Wisconsin,  and  did  busi- 
ness in  Milwaukee,  but  at  the  same  time  he  was  a  part- 
ner in  the  jewelry  business  of  Rosenkrans  &  Weber,  in 
Chicago,  the  firm  being  composed  of  Rosenkrans  and  Lucy 
B.  Weber,  who  was  the  wife  of  J.  H.  ^^'eber.  J.  H.  Weber 
had  the  general  management  of  the  business  of  this  Chicago 
firm.  On  or  about  the  first  of  February,  1883,  the  bill  of 
goods  remaining  unpaid,  Johnson,  who  had  sold  the  goods, 
induced  Barker  to  visit  Chicago,  under  the  pretence  that 
he  would  enter  into  partnership  with  him  in  the  jewelr}^ 
business,  in  Chicago.     Upon  the  arrival  of  Barker,  Weber 


^  The    Reporter's    statement    of    the    facts    of    the    case,    and    his 
note   of   the   argument  of   the  counsel   for  the  appellee   are  omitted. 


ROSEXKRAXS  :■.  BARKER  IZ7 

was  notified,  by  Johnson,  of  the  arrival,  and  on  the  5th 
day  of  February,  1883,  Weber  filed  a  petition  and  obtained 
an  order  for  a  writ  of  nc  exeat.  The  writ  was  issued, 
and  placed  in  the  hands  of  the  sherifif,  who  arrested  Barker, 
and  held  him  in  custody  ten  or  twelve  hours,  when  he 
was  released  on  bail.  Subsequently,  and  on  the  17th  day 
of  March,  1883,  on  demurrer,  the  petition  was  dismissed. 
It  does  not  appear  that  Rosenkrans  had  any  knowledge 
that  the  proceedings  had  been  instituted  against  Barker, 
until  about  the  first  day  of  April.  1883,  and  at  this  time 
the  petition  for  a  ne  exeat  had  been  held  bad  on  demurrer, 
and  dismissed,  and  Weber  had  then,  or  few  days  there- 
after, appealed  to  the  Appellate  Court.  \\'hen  Rosenkrans 
learned  what  had  been  done,  he  notified  ^^'eber  that  it  was 
wrong,  and  advised  the  dismissal  of  the  appeal  from  the 
Appellate  Court,  and  under  his  advice  no  further  steps 
were  taken  to  prosecute  the  appeal.     «     *     * 

It  is,  however,  claimed  by  appellee,  that  Rosenkrans 
is  liable  upon  either  one  of  two  grounds :  First,  because 
those  who  caused  the  arrest  were  servants  or  agents  of 
Rosenkrans,  acting  within  the  scope  of  their  agency.  *  * 
*-.  Weber,  who  caused  the  arrest  of  Barker,  was  not,  in 
fact,  a  partner  of  Rosenkrans,  but  he  acted  for  his  wife, 
who  was  the  partner,  and  so  far  as  the  acts  are  concerned, 
they  may  be  regarded  as  the  acts  of  Rosenkrans'  partner. 
In  many  respects  one  partner  is  the  agent  of  the  other. 
In  the  purchase  and  sale  of  goods  within  the  scope  of  the 
partnership  business,  the  acts  of  one  may  be  regarded  as 
the  acts  of  both.  In  such  cases  the  one  that  transacts  the 
business,  acts  for  himself  and  in  the  capacity  as  agent  of 
the  other,  and  in  that  capacity  he  binds  himself  and  also 
binds  his  partner.  By  entering  into  partnership,  each 
party  reposes  confidence  in  the  other,  and  constitutes  him 
his  general  agent  as  to  all  partnership  concerns.     (Gow  on 


'Only  that  part  of  the  opinion  which  relates  to  the  "first  ground" 
is  reprinted. 


338         PARTNER'S   POWER  TO   BIXD   COPARTNER 

Partnership,  52.)  But  the  question  involved  here  is  not 
as  to  the  habihty  of  one  partner  for  the  contracts  of  the 
other,  but  it  is  whether  one  partner  may  be  Hable  in  dam- 
ages for  the  w^rongs  of  the  other.  Mr.  Collyer,  in  his 
work  on  Partnership,  section  457,  says :  "A  learned  writer 
observes,  that  though  partners  are,  in  general,  bound  by 
the  contracts,  they  are  not  answerable  for  the  wrongs  of 
each  other.  In  general,  acts  or  omissions  in  the  course  of 
the  partnership  trade  or  business,  in  violation  of  law,  will 
only  implicate  those  who  are  guilty  of  them."  And  in 
I  Lindley  on  Partnership,  bk.  2,  chap,  i,  sec.  4,  the  author 
says :  "As  a  rule,  however,  the  willful  tort  of  one  partner 
is  not  imputable  to  the  firm.  For  example,  if  one  partner 
maliciously  prosecutes  a  person  for  stealing  partnership 
property,  the  firm  is  not  answerable  unless  all  the  members 
are,  in  fact,  privy  to  the  malicious  prosecution."  In  Gilbert 
V.  Emmons,  42  111.  143,  where  a  question  arose  as  to  the 
liability  of  one  partner  for  the  act  of  the  other  in  causing 
the  arrest  of  a  person  charged  with  larceny  of  money  be- 
longing to  the  firm,  it  was  held  that  the  mere  knowledge 
and  consent  of  one  partner  that  the  other  should  have  the 
person  accused  arrested,  would  not  render  the  partner  so 
knowing  and  consenting,  liable  to  an  action  for  malicious 
prosecution.  It  was  necessary  that  the  consent  should  be 
of  such  a  character  as  to  amount  to  advice  and  coopera- 
tion. In  Grund  v.  Van  Vleck,  69  111.  478,  a  question  arose 
as  to  the  liability  of  one  partner  for  the  tort  of  the  other, 
and  it  was  held  that  one  partner  can  not  involve  another 
in  a  trespass  unless  in  the  ordinary  course  of  their  busi- 
ness, and  in  a  case  where  the  trespass  is  in  the  nature  of  a 
taking  which  is  available  to  the  partnership;  and  in  such 
case,  to  render  the  partner  liable  who  did  not  join  in  the 
commission  of  the  trespass,  he  must  afterwards  have  con- 
curred, and  received  the  benefit  of  it.  Here  no  part  of 
the  debt  was  collected  by  the  commencement  or  prosecu- 
tion of  the  proceedings  against  Barker,  and  it  is  not  claimed 


ROSEXKRAXS  v.  BARKER  339 

that  a  liability  exists  on  account  of  receiving  any  benefit 
from  the  arrest,  and  if  Rosenkrans  is  to  be  held  liable,  it 
is  upon  the  ground  that  he  was  a  member  of  the  firm  which 
instituted  the  suit  and  caused  the  arrest.  This,  under  the 
authorities  cited,  can  not  be  done. 
Judgment  reversed. 


340         PARTNER'S   POWER   TO   BIND   COPARTNER 


LOTHROP  V.  ADAMS. 

In  the  Supreme  Judicial  Court  of  Massachusetts, 

1882. 

133  Massachusetts  Reports,  471. 

Tort,  in  seven  counts,  against  the  proprietors  of  a 
newspaper,  called  the  Springfield  Republican,  for  publish- 
ing in  said  paper,  at  different  times,  false  and  malicious 
libels  of  and  concerning  the  plaintiff,  a  minister,  in  respect 
to  his  treatment  of  his  family. 

The  defendants  asked  the  judge  to  rule,  that  express 
malice  of  one  of  the  defendants  could  not  affect  the  other 
defendants,  unless  it  appeared  that  they  participated  in  such 
malice ;  and  if  the  jury  should  find  a  verdict  on  the  ground 
of  express  malice,  they  could  find  it  as  to  those  only  who 
were  shown  to  be  actuated  by  such  malice.  The  judge  re- 
fused so  to  rule.^ 

Field,  J. : 

In  a  civil  action  for  a  libel,  before  the  passing  of  any 
statute  on  the  subject,  the  truth  of  the  words  published  was 
a  defence,  whether  they  were  published  with  or  without 
malice;  but  if  the  words  published  were  false,  it  was  no 
defence  that  the  person  who  published  them  believed  them 
to  be  true,  unless  the  communication  was  privileged.  Ex- 
cept, then,  in  cases  of  privileged  communications,  it  was 
generally  true  that  evidence  of  actual  malice  or  of  the 
want  of  actual  malice  was  immaterial  to  the  right  of  ac- 
tion, and  was  admissible,  if  admissible  at  all,  only  for  the 
purpose  of  enhancing  or  diminishing  the  damages. 

The  Gen.  Sts.  c.  129,  §  yy,  provide  that,  "In  every 
prosecution  and  in  every  civil  action  for  writing  or  for 
publishing  a  libel,  the  defendant  may  upon  the  trial  give 

'  Only  so  much  of  the  Reporter's  statement  of  facts  and  of  the 
opinion  of  Judge  Field  as  relates  to  this  refusal  of  the  trial  judge 
are   reprinted. 


LOTHROP  z:  ADAMS  341 

in  evidence  the  truth  of  the  matter  contained  in  the  pubh- 
cation  charged  as  Hbellous;  and  such  evidence  shall  be 
deemed  a  sufficient  justification,  unless  malicious  intention 
shall  be  proved."  This  is  a  reenactment  of  the  St.  of  1855, 
c.  396.  For  previous  statutes,  see  Rev.  Sts.  c.  100,  §  19,  c. 
133,  §  6;  St.  1826,  c.  107,  §1.  Since  the  passage  of  the'St. 
of  1855,  c.  396,  the  truth  of  the  words  published  is  no 
longer  an  absolute  defence ;  the  plaintiff  may,  notwithstand- 
ing the  words  are  true,  maintain  his  action  if  he  can  show 
that  they  were  published  with  malicious  intention. 

The  defendants  in  this  case  were  copartners,  engaged  in 
the  publication  of  a  newspaper.  The  court  was  requested 
by  the  defendants  to  rule  "that  express  malice  of  one  of  the 
defendants  could  not  affect  the  other  defendants,  unless 
it  appeared  that  they  participated  in  such  malice;  and  if  the 
jury  should  find  a  verdict  on  the  ground  of  express  malice, 
they  could  find  it  as  to  those  only  who  were  shown  to  be 
actuated  by  such  malice."  The  court  refused  to  give  this 
ruling.  The  statute  undoubtedly,  by  using  the  words  "ma- 
licious intention,"  means  an  actual  malicious  intention, 
which  the  defendants  in  their  request  properly  enough  de- 
nominate "express  malice."  The  malice  which  it  has  been 
said  the  law  ordinarily  implies,  in  actions  of  slander  or  libel, 
from  the  uttering  or  publishing  of  false  defamatory  words, 
is  in  one  sense  a  fiction,  invented  to  satisfy  the  forms  of 
pleading.  The  words  "express  malice"  have  been  used,  in 
contra-distinction  to  the  malice  which  it  was  said  the  law 
implies,  to  mean  actual  malice,  or  malice  in  fact,  which  is 
the  same  thing  as  malicious  intention.  The  correctness  of 
the  ruling  asked  for  must  be  determined  by  the  rules  of 
law  applicable  to  civil  actions,  in  which  a  specific  actual 
intention  or  purpose  must  be  shown  to  exist  in  order  to 
maintain  the  action.  But  it  has  been  established,  on  much 
consideration,  as  one  of  the  general  principles  of  the  law 
of  agency,  that  the  principal  is  liable  civilly  in  damages  for 
the  torts  of  his  agent  done  for  his  benefit  in  the  prosecution 
of  his  business,  and  within  the  scope  of  the  agent's  employ- 
ment, and  this  rule  has  been  extended  to  wilful  trespasses, 


342         PARTNER'S   POWER   TO   BIND   COPARTNER 

fraudulent  misrepresentations,  malicious  prosecutions  and 
libels.  The  greatest  difficulty  has  been  felt  in  extending  this 
liability  to  corporations  aggregate.  Rccd  v.  Home  Savings 
Bank,  130  Mass.  443,  was  an  action  of  tort  against  a  savings 
bank  for  malicious  prosecution.  In  the  opinion  Mr.  Justice 
Lord  says,  "By  the  great  weight  of  modern  authority,  a 
corporation  may  be  liable  even  when  a  fraudulent  or  mali- 
cious intent  in  fact  is  necessary  to  be  proved,  the  fraud  or 
malice  of  its  authorized  agents  being  imputable  to  the  cor- 
poration;" and  many  authorities  are  cited.  For  additional 
authorities  when  the  action  is  for  a  libel,  see  Aldrich  v.  Press 
Printing  Co.,  9  Minn.  133;  Maynard  v.  Fireman's  Fund 
Ins.  Co.,  47  Cal.  207;  Johnson  v.  St.  Louis  Dispatch  Co., 
2  Mo.  App.  565. 

The  logical  difficulty  of  imputing  the  actual  malice 
or  fraud  of  an  agent  to  his  principal  is  perhaps-  less  when 
the  principal  is  a  person  than  when  it  is  a  corporation;  still 
the  foundation  of  the  imputation  is  not  that  it  is  inferred 
that  the  principal  actually  participated  in  the  malice  or 
fraud,  but,  the  act  having  been  done  for  his  benefit  by  his 
agent  acting  within  the  scope  of  his  employment  in  his 
business,  it  is  just  that  he  should  be  held  responsible  for 
it  in  damages. 

As  partners  are  the  general  agents  of  each  other  and 
of  the  firm,  within  the  scope  of  the  business  of  the  partner- 
ship, we  think  a  test  of  the  question  we  are  considering  is 
the  liability  of  the  proprietor  of  a  newspaper  in  damages 
for  a  libel  maliciously  published  without  his  knowledge  by 
his  agent,  whom  he  has  entrusted  with  the  management  of 
the  newspaper,  and  this  we  regard  as  well  settled.  Shcp- 
heard  v.  Whitaker,  L.  R.  10  C.  P.  502.  Dunn  v.  Hall,  i 
Ind.  344.  Andres  v.  Wells,  7  Johns.  260.  Perret  v.  New 
Orleans  Times  Newspaper,  25  La.  An.  170.  Storey  v.  Wal- 
lace, 60  111.  51. 

Smith  V.  Ashley,  11  Met.  367,  rests  on  its  own  facts, 
and  decides  nothing  in  reference  to  the  liability  of  a  prin- 
cipal for  the  malicious  acts  of  his  agent,  done  for  his  bene- 


I 


LOTHROP  z:  ADAMS  343 

fit,  in  the  prosecution  of  his  business  within  the  scope  of  his 
employment. 

Upon  this  ground  of  agency,  partners  have  been  held 
liable  in  civil  actions  for  the  fraudulent  or  malicious  con- 
duct of  one  of  them,  done  without  the  knowledge  of  the 
others,  for  the  benefit  of  the  partnership  and  within  the 
scope  of  its  business.  Locke  v.  Stearns,  i  Met.  560.  Gray 
V.  Cropper,  i  Allen,  337.  White  v.  Sawyer,  16  Gray,  586. 
Durant  v.  Rogers,  87  111.  508.  Wolf  v.  Mills,  56  111.  360. 
Chester  v.  Dickerson,  54  N.  Y.  i.  Guilloti  v.  Peterson,  89 
Penn.  St.  163.    Rex  v.  Marsh,  2  B.  &  C.  717,  723. 

If  the  liability  of  the  principal  for  the  fraudulent  acts 
of  the  agent,  done  within  the  scope  of  his  employment,  be 
limited  to  those  cases  in  which  the  principal  derives  a  bene- 
fit from  the  act  of  the  agent,  and  a  corresponding  limita- 
tion be  put  upon  the  liability  of  one  partner  for  the  fraudu- 
lent acts  of  another,  done  within  the  scope  of  the  partner- 
ship business,  yet  when  a  partnership  publishes  a  newspaper, 
whatever  benefit,  if  any,  is  derived  from  the  publication  of 
a  libel  is  necessarily  received  by  the  partnership. 

The  statute  requires  that  an  actual  malicious  intention 
in  making  the  publication  shall  be  found,  if  the  matter  pub- 
lished be  true;  but  we  are  of  the  opinion  that  the  Legisla- 
ture, in  enacting  this  statute,  did  not  intend  to  change  the 
rules  of  law  whereby  one  person  is  made  responsible  in 
damages  for  the  wrongs  done  by  another,  but  left  them  to 
be  applied  according  to  the  principles  which  govern  the  ad- 
ministration of  the  law;  and  that  the  court  rightly  refused 
to  give  the  ruling  requested. 

Exceptions  overruled.^ 

^Compare:  Woodling  v.  Knickerbocker,  31  Minn.  268,  1883.  (A 
and  B  were  in  tlie  furniture  and  drapery  business.  A,  without  the 
knowledge  or  consent  of  B,  placed,  or  allowed  to  be  placed,  on  a 
table  in  the  street  window  of  the  store  a  placard  reading  as  fol- 
lows :  "This  was  taken  back  from  Dr.  Woodling  as  he  would  not 
pay  for  it;"  and  also  placed  about  two  feet  from  this  placard  an- 
other, on  which  was  written  "Moral :  Beware  of  deadbeats."  The 
person  libelled  sued  A  and  B  as  partners.  Held,  he  could  not  re- 
cover from  B  as  there  was  nothing  in  the  nature  of  the  business  of 
the  firm  "from  which  authority  to  one  partner  or  to  a  servant  to 
gratuitously  publish  a  libel  can  be  implied.") 


344         PARTNER'S   POWER  TO   BIND   COPARTNER 


WILLIAMS  V.  HENDRICKS. 
In  the  Supreme  Court  of  Alabama,   1896. 

115  Alabama  Reports,  277.^ 

Coleman,  J. — Section  3296  of  the  Code  of  1886, 
provides  that  "any  person  who  cuts  down  any  oak  *  *  ''•' 
on  land  not  his  own,  willfully  and  knowingly,  without 
the  consent  of  the  owner  of  the  land,  must  pay  to  the 
owner  ten  dollars  for  every  such  tree,"  &c.  The  plain- 
tiff, the  appellee,  sued  to  recover  the  statutory  penalty  for 
cutting  down  thirty-four  oak  trees.  The  evidence  shows 
that  the  defendant  and  one  Hinton  were  partners  in  get- 
ting staves,  and  according  to  their  agreement,  the  defend- 
ant furnished  the  money  for  the  partnership  and  Hinton 
attended  to  the  business  of  getting  out  the  staves.  He 
furnished  to  defendant  at  regular  stated  periods  the 
amounts  due  parties  from  whom  trees  were  purchased,  and 
also  what  was  due  for  labor,  and  the  defendant  settled  the 
claims  as  thus  reported.  There  was  evidence  tending  to 
show,  that  Hinton  had  no  authority  from  defendant  to  cut 
trees  on  any  land  except  by  agreement  and  purchase  from 
the  owner,  and  that  the  trees  in  controversy  were  cut  by 
Hinton  for  staves  without  the  knowledge  and  consent  01 
the  defendant.  One  of  the  questions  involved  in  the  case 
was,  whether  the  fact  that  defendant  and  Hinton  were 
partners  in  the  stave  business  subjected  the  defendant  to 
the  statutory  penalty.     *     *     * 

If  in  the  case  at  bar  the  plaintiff  had  sued  to  recover 
the  consequential  damages  sustained  by  the  tortious  cut- 
ting of  the  trees  by  Hinton,  the  partner,  we  would  with- 
out hesitation,  under  the  well  settled  principles  (declared 
in  the  foregoing  cases),  hold  that  defendant  was  responsi- 

*  The  Reporter's  statement  of  the  facts  is  omitted. 


WILLIAMS  V.  HENDRICKS  345 

ble  for  such  damages,  resulting  naturally  and  proximately 
from  the  tortious  acts  of  his  partner,  done  in  the  range  of 
the  partnership  business.  The  penalty  is  not  imposed  for 
a  mere  mistake  or  negligence  in  cutting  the  trees.  The 
cutting  must  be  done  knowingly  and  willfully.  Different 
principles  arise  when  it  is  sought  to  hold  a  principal  re- 
sponsible for  the  criminal  acts  of  his  agent  or  servant. 
The  act  is  highly  penal,  and  must  be  strictly  construed ; 
and  before  a  party  can  be  subjected  to  its  penalties,  it  must 
clearly  appear  that  he  has  violated  it  knowingly  and  will- 
fully. It  is  not  enough  in  such  a  case,  that  a  partner  or 
servant,  without  his  knowledge  and  contrary  to  instruc- 
tions and  against  his  assent,  has  committed  the  unlawful 
act.  To  so  hold  would  be  to  extend  the  statute  by  judicial 
interpretation  beyond  its  meaning  and  its  positive  terms. 

[The  Attorneys  for  the  plaintiff  had  argued : 
"Williams  is  liable  by  the  relation  of  partner. — Allen 
V.  Lelghton,  87  j\Ie.  206.  The  requirement  to  enter  sat- 
isfaction of  a  mortgage  is  as  penal  as  this  case.  Yet  no- 
tice to  one  member  renders  the  other  liable  for  the  pen- 
alty.— Williams  v.  Bowdin,  68  Ala.  126;  Renfro  v.  Adams, 
62  Ala.  305.  The  statute  against  cutting  trees  is  no  less 
penal  than  that  satisfying  mortgages. — Postal  Tel.  Co.  v. 
Brantley,  107  Ala.  687."] 

What  was  said  in  the  case  of  Postal  Telegraph  Co.  z\ 
Brantley,  107  Ala.  683.  and  Ih.  v.  Lenoir,  lb.  640,  is  wholly 
correct  when  applied  to  the  common  law  action  for  the 
recovery  of  damages.  A  decision  of  the  question  now 
considered  was  not  before  the  court  in  either  of  those  cases, 
and  what  was  said  with  reference  to  the  liability  of  a  prin- 
cipal for  the  statutory  penalty  was  merely  dictum.  Wc 
have  been  referred  to  the  case  of  Renfro  &  Andrezvs  v. 
Adams,  62  Ala.  302.  where  the  action  was  for  the  recov- 
ery of  the  penalty  imposed  for  a  failure  to  enter  satisfac- 
tion of  a  mortgage   under   section  2223   of   the   Code   of 


346         PARTNER'S   POWER   TO   BIND   COPARTNER 

1876.  We  approve  of  all  that  was  said  and  decided  in 
that  case.  The  mortgage  was  executed  to  the  partnership 
as  a  unit,  and  the  action  was  against  the  partnership  as  a 
unit.  The  statute  imposed  the  penalty  upon  "any  mort- 
gagee who  failed  to  enter  satisfaction  after  notice  by  the 
mortgagor."  The  duty  was  imposed  upon  the  partnership 
as  mortgagee.  The  question  was,  whether  notice  to  one 
partner  was  notice  to  the  partnership.  We  do  not  doubt 
that  it  was  correctly  held  to  be  sufficient.  Under  the  one 
act,  mere  negligence  or  failure  to  act  incurs  the  penalty. 
In  the  other,  an  affirmative  act  knowingly  and  willfully 
done  is  necessary. 

Reversed  and  remanded.^ 


^  Where  the  state  imposes  a  penalty  for  "knowingly"  violating 
an  Act,  as  the  receipt  of  goods  on  which  the  duty  has  not  been  paid, 
the  innocent  partner  would  apparently  not  be  liable  in  an  action  for 
the  penalty,  even  though  his  co-partner  took  the  goods  in  the  course 
of  the  business  knowing  them  to  be  smuggled.  The  early  English 
cases  against  partners  to  collect  the  penalty  for  the  violation  of  the 
Revenue  Laws  are  cases  in  which  all  the  partners  "knowingly"  vio- 
lated the  Act.  See  Attorney  General  v.  Burges,  Bunb.  223,  1726; 
King  V.  Manning,  Com.  Rep.  616,  1739.  These  cases  are  mistakenly 
cited  by  Story  for  the  proposition  that  the  innocent  partner  in  such 
a  case  would  be  liable.     See   Story  on   Partnership,   Sec.   166. 

Where  the  state  imposes  a  penalty  for  the  violation  of  an  Act, 
without  inserting  the  word  "knowingly."  it  has  been  held  that  a 
principal  is  liable  to  conviction  on  information  where  the  Act  was 
violated  by  his  servant  acting  in  his  business.  Mullins  v.  Collins,  L.  R. 
9,  Q.  B.  292,  1874.  Compare:  Newman  v.  Jones,  L.  R.  17,  Q.  B.  D. 
132,  1886.  Apparently  the  same  should  hold  true  if  the  person  vio- 
lating the  Act  was  the  partner  of  the  person  against  whom  the  in- 
formation was  brought. 

All  partners  are,  of  course,  liable  in  an  action  by  the  govern- 
ment brought  to  recover  the  actual  amount  of  the  duties  on  goods 
imported  by  the  partnership,  which,  by  mistake  or  fraud,  have  not 
been  paid.    Attorney  General  v.  Stranyforth,  Bunb.,  97,  1721. 


1 


WHITTAKER  v.  COLLINS  347 


WHITTAKER  v.  COLLINS. 
In  the  Supreme  Court  of  Minnesota,  1885. 

34  Minnesota  Reports,  399. 

Mitchell,  J.  This  is  an  action  for  damages  caused 
by  the  negligence  and  nnskilfuhiess  of  defendant  as  a  phys- 
ician and  surgeon.  It  appears  from  the  complaint,  in  sub- 
stance, that  defendant  and  one  Graff  were  copartners  as 
practising  physicians  and  surgeons ;  that,  plaintiff's  leg 
having  been  broken,  he  employed  the  firm  to  set  it,  and 
to  care  for  and  treat  him  professionally;  that  part  of  the 
time  Graff  attended  him,  and  did  his  work  skilfully;  that 
the  remainder  of  the  time  his  partner,  the  defendant,  at- 
tended the  plaintiif,  and  performed  his  duties  negligently 
and  unskilfully,  causing  the  injuries  complained  of.  Both 
were  acting  in  the  line  of  their  partnership  business,  and 
imder  and  in  pursuance  of  the  employment  of  the  firm  pro- 
fessionally by  the  plaintiff. 

The  court  below  having  sustained  a  demurrer  to  the 
complaint  on  the  ground  of  a  defect  of  parties  defendant, 
the  sole  question  raised  by  this  appeal  is  whether  Graff, 
defendant's  partner,  should  have  been  made  a  party  de- 
fendant. The  admitted  rule  is  that  in  actions  on  contract 
all  persons  jointly  liable  must  be  sued,  but  that  in  actions 
for  tort,  disconnected  from  any  contract,  the  tort-feasors 
need  not  be  joined.  The  question  is,  what  rule  applies  in 
what  are  sometimes  called  actions  for  torts  founded  on 
contracts,  or  actions  ex  quasi  contractu f 

The  principle  running  through  all  the  cases  seems  to 
be  that  where  the  action  is  maintainable  for  the  tort  simply, 
without  reference  to  any  contract  between  the  parties,  the 
action  is  one  of  tort  purely,  although  the  existence  of  a 
contract  may  have  been  the  occasion  or  furnished  the  op- 


348         PARTNER'S   POWER  TO   BIXD   COPARTNER 

portunity  for  committing  the  tort.  But  where  the  action 
is  not  maintainable  without  pleading  and  proving  the  con- 
tract,— where  the  gist  of  the  action  is  the  breach  of  the 
contract,  either  by  malfeasance  or  nonfeasance, — it  is,  in 
substance,  whatever  may  be  the  form  of  the  pleading,  an 
action  on  the  contract,  and  hence  all  persons  jointly  liable 
must  be  sued,  i  Chit.  PI.  87 ;  Pomeroy  on  Remedies,  §  282  ; 
Dicey,  Parties,  437 ;  i  Lindley  on  Partnership,  482 ;  2  Coll- 
yer,  Partnership,  §  732;  Pozvell  v.  Layton,  2  Bos.  &  Pul. 
365;  Max  V.  Roberts,  Id.  454;  Cabell  v.  Vaiighan,  i  Wms. 
Saund.  288/i^  ^9^^,  291/;  Weall  v.  King,  12  East,  452; 
Bretherton  v.  Wood,  3  Brod.  &  B.  54;  Walcott  v.  Canfield, 
3  Conn.  194. 

According  to  this  test  it  seems  to  us  clear  that  this  is 
an  action  on  the  contract.  The  gist  and  gravamen  is  the 
breach  of  its  terms,  which,  whether  express  or  implied, 
were  that  these  physicians  and  surgeons  would  treat  the 
plaintiff  with  ordinary  professional  skill  and  care.  It 
would  have  been  impossible  for  plaintiff  to  state  his  cause 
of  action  without  alleging  the  contract,  for  the  liability  of 
the  defendant  arose  solely  out  of  it,  and  not  out  of  some 
general  common-law  duty  independent  of  contract. 

The  only  cases  which  appellant  cites  in  support  of 
his  contention  are  Govett  v.  Radnidge,  3  East,  62,  and  White 
v.  Smith,  12  Rich.  595.  The  first  of  these  cases  has  been 
overruled,  and  is  no  longer  considered  law.  The  latter 
was  an  action  for  damages  for  the  loss  of  a  slave  killed 
through  the  negligence  of  a  partnership,  while  in  their 
charge  under  a  contract  of  hire.  The  court  placed  its  de- 
cision wholly  upon  the  ground  that  the  gravamen  of  the 
suit  was  not  the  contract,  but  the  negligence  of  the  de- 
fendant, and  that  the  contract  was  mere  matter  of  recital 
to  explain  that  the  slave  was  in  charge  of  the  defendant, 
and  adds:  "Proof  of  any  other  process  by  which  the 
charge  resulted  would  have  been  admissible."  At  least 
this  is  the  ground  upon  which  the  court  decided  the  case, 


WHITTAKER  v.  COLLINS  349 

and  is  the  only  one  upon  which  the  decision  can  be  sus- 
tained, if  at  all.  But  in  the  case  at  bar  the  foundation  of 
the  action  is  the  contract,  and  the  gravamen  of  it  its  breach. 
There  is  no  force  in  the  suggestion  that  Graff  was  not  a 
necessary  party  because  personally  innocent.  This  same 
suggestion  was  made  by  counsel  in  Powell  v.  Layton,  supra. 
The  act  of  one  partner  in  the  line  of  the  copartnership  busi- 
ness is  the  act  of  all. 
Order  affirmed. 


350         PARTNER'S   POWER  TO   BIND   COPARTNER 


PAGE  V.  CITIZENS'  BANKING  CO. 
In  the  Supreme  Court  of  Georgia,  1900. 

Ill   Georgia  Reports,  1Z- 

Cobb,  J.  Page  brought  suit  against  Ashburn,  Pea- 
cock, Edwards,  Lietch,  Williams,  Rogers,  and  the  Citizens' 
Banking  Company  of  Eatonton,  which  was  alleged  to  be 
a  partnership  composed  of  the  five  persons  first  above 
named.  The  petition  contained  three  counts,  one  for  mali- 
cious prosecution,  one  for  malicious  arrest,  and  one  for 
false  imprisonment.^ 

The  facts  alleged  in  each  of  the  counts  were,  in  sub- 
stance, as  follows :  Rogers  was  the  sheriff  of  the  county, 
and  as  such  had  levied  a  mortgage  execution  in  favor  of 
the  Citizens'  Banking  Company  against  petitioner  upon  a 
certain  stock  of  goods,  which  was  in  the  possession  of 
the  sheriff  under  the  levy  at  the  former  place  of  business 
of  petitioner.  Lietch  and  Rogers  united  in  making  an  affi- 
davit that  "thirty-one  suits  of  men's  clothing  have  recently 
been  taken  from  the  storehouse  occupied  by  J.  D.  Page  and 
held  in  custody  of  J.  C.  Rogers,  sheriff  of  Dodge  county, 
Georgia,  under  levy  of  a  mortgage  fi.  fa.,  and  now  occu- 
pied by  W.  H.  Clements,  and  the  same  has  been  taken  by 
criminal  means  and  carried  away,  and  that  they  believe 
and  have  probable  cause  to  believe  that  the  said  property 
is  now  concealed  in  the  dwelling  and  premises  occupied  by 
J.  D.  Page,  located  on  College  street,  in  the  town  of  East- 
man." On  this  affidavit  a  warrant  was  issued,  directing 
that  the  house  and  premises  of  Page  be  searched,  and,  if 
the  property  described  in  the  affidavit  be  found  therein,  that 
he  be  arrested  and,  together  with  the  property  so  found, 


'  Only  so  much  of  the  opinion  as  relates  to  the  demurrer  to  the 
count  for  malicious  prosecution  is  reprinted. 


PAGE  V.  CITIZENS'  BAXKING  CO.  351 

brought  before  some  judicial  officer,  to  be  dealt  with  as 
the  law  directs.  It  was  distinctly  alleged  in  the  petition 
that  when  Lietch  and  Rogers  made  this  affidavit  they  were 
acting  for  themselves  as  well  as  for  the  Citizens'  Banking 
Company,  and  with  the  approval  and  by  the  direction  oi 
each  member  of  that  partnership.  The  warrant  issued  on 
this  affidavit  was  placed  in  the  hands  of  the  town  marshal 
and  county  bailiff,  and  the  house  and  premises  of  petitioner 
were  thoroughly  searched.  None  of  the  property  described 
in  the  affidavit  was  found  therein,  but  the  officer  seized 
three  pieces  of  dress  flannel  and  two  suits  of  children's 
clothes,  and  arrested  petitioner.  Subsequently  to  i\\z  ar- 
rest, the  bailiff,  with  other  persons,  returned  and  made 
another  search  of  the  premises,  but  found  none  of  the  prop- 
erty described  in  the  affidavit.  Petitioner  was  taken  before 
a  justice  of  the  peace,  when  Lietch,  Edwards,  and  Wil- 
liams, acting  for  themselves  and  for  the  other  members  of 
the  firm,  appeared  to  prosecute  plaintiff,  with  an  attorney 
who  was  employed  by  the  Citizens'  Banking  Company  as 
a  partnership  and  each  and  all  of  the  members  of  the  same. 
In  pursuance  of  that  employment  such  attorney  did  repre- 
sent the  prosecution  against  the  plaintiff  from  its  incep- 
tion to  its  termination.  Petitioner  asked  that  he  be  re- 
leased from  custody,  on  the  ground  that  the  affidavit  upon 
which  the  warrant  was  issued  was  defective  and  void  and 
failed  to  charge  any  offense  against  him,  and  that  for  that 
reason  his  arrest  and  detention  were  unlawful.  Lietcii, 
Edwards,  and  Williams  objected  to  the  release  of  peti- 
tioner, and  the  magistrate  refused  to  order  his  discharge. 
He  then  asked  for  an  immediate  investigation  or  prelim- 
inary trial,  but  the  parties  just  referred  to  objected  to  this, 
and  upon  their  application  the  hearing  was  continued  to 
the  next  day.  To  avoid  being  placed  in  jail,  petitioner 
offered  to  give  a  bond  for  his  appearance,  but  the  magis- 
trate held  that  a  bond  must  be  given  to  appear  and  answer 
for  the  offense  of  larceny,  and  petitioner  gave  the  bond 


352         PARTNER'S   POWER   TO    BIXD   COPARTNER 

to  appear  for  a  preliminary  hearing  on  the  next  day  for 
the  offense  of  larceny. 

At  the  time  fixed  for  the  preliminary  trial,  Rogers, 
Lietch,  Edwards,  and  Williams,  acting  for  themselves  and 
with  the  approval  of  Ashburn  and  Peacock,  the  other  mem- 
bers of  the  partnership,  again  appeared  with  their  attorney 
before  the  magistrate  for  the  purpose  of  prosecuting  peti- 
tioner, and  on  their  motion  the  case  was  again  continued 
until  the  following  day,  over  the  objection  of  petitioner, 
who  was  present  and  demanding  a  hearing.  At  the  time 
fixed  in  this  last  order  of  postponement,  petitioner  appeared 
with  his  counsel  before  the  magistrate,  and  thereupon  the 
prosecution,  by  their  attorney,  asked  leave  of  the  court  to 
withdraw  the  warrant  and  to  restore  to  petitioner  the  arti- 
cles which  had  been  seized  by  the  officer  who  searched  his 
house ;  the  attorney  representing  the  prosecution  stating 
that  it  was  impossible  to  make  out  a  case.  An  order  was 
then  granted,  discharging  petitioner  from  custody,  and  re- 
storing to  him  the  articles  which  had  been  seized.  It  was 
distinctly  alleged  that  while  Rogers  and  Lietch,  the  per- 
sons upon  whose  affidavit  the  warrant  was  issued,  were  the 
nominal  prosecutors  of  petitioner,  Ashburn,  Edwards,  Wil- 
liams, and  Peacock,  and  the  Citizens'  Banking  Company 
as  a  partnership,  were  all  jointly  and  severally  the  prose- 
cutors in  the  case.  Petitioner  alleges  that  he  was  inno- 
cent of  any  offense,  and  that  he  did  not  take  and  carry 
away  any  of  the  articles  named  in  the  affidavit,  nor  were 
any  of  them  concealed  in  his  dwelling  or  about  his  prem- 
ises, and  that  the  prosecutors  had  no  probable  cause  what- 
ever to  believe  that  the  same  were  so  concealed ;  that  the 
articles  seized  by  the  officer  constituted  no  part  of  the  prop- 
erty mentioned  in  the  affidavit,  but  were  the  property  of 
petitioner,  his  wife  and  children,  and  had  never  been  in 
the  possession  or  custody  of  Rogers.  Petitioner  was  in 
actual  custody  of  the  arresting  officers  for  several  hours, 
and  was  in  their  constructive  custody  for  forty-three  hours 


PAGE  z:  CITIZENS'  BANKING  CO.  353 

before  lie  was  released.  It  is  alleged  that  the  prosecu- 
tion was  maliciously  instituted  and  carried  on  without 
probable  cause,  the  prosecutors  having  no  ground  what- 
ever for  the  proceeding,  other  than  their  desire  to  injure 
petitioner.  As  matter  of  aggravation  and  as  evidence  of 
malice,  it  is  alleged  that  the  defendants  circulated  dispar- 
aging and  damaging  reports  about  petitioner,  charging  that 
large  quantities  of  goods  stolen  from  the  custody  of  the 
sheriff  had  been  found  by  the  officers  in  the  house  of  peti- 
tioner, that  he  had  a  secret  key  to  the  store  in  which  such 
goods  were  located,  and  that  he  had  taken  such  goods. 

To  this  petition  the  defendants  filed  demurrers,  both 
general  and  special.  The  court  sustained  the  demurrers 
and  dismissed  the  petition,  and  this  ruling  is  assigned  as 
error.     *     *     * 

I.  Is  a  partnership  ever  liable  as  such  in  an  action 
for  a  malicious  prosecution?  If  so,  under  what  circum- 
stances can  such  an  action  be  maintained  ?  One  partner 
may  be  rendered  liable  for  the  acts  of  his  copartner. 
Whetlier  or  not  he  is  so  liable  is  to  be  determined  by  the 
application  of  the  rules  governing  the  relation  of  principal 
and  agent ;  and  generally  the  partnership  is  liable  for  the  act 
of  one  of  the  partners  if  it  would  have  been  liable  had  the 
same  act  been  committed  by  an  agent  intrusted  by  the  firm 
with  the  management  of  its  business.  17  Am.  &  Eng.  Enc. 
L.  (ist  ed.)  1066.  If  a  tort  be  committed  by  one  partner 
while  engaged  in  a  transaction  within  the  scope  of  the  part- 
nership business,  and  such  tort  be  committed  in  furtherance 
of  the  interests  of  the  partnership,  it  will  be  liable.  But  it 
will  not  be  liable  for  a  tort  committed  by  one  partner  in  a 
transaction  outside  of  the  partnership  business,  where  he 
acts  from  his  own  private  malice  or  ill  will,  unless  the  act 
which  constituted  the  tort  was  authorized  by  the  members 
of  the  partnership  or  subsequently  ratified  by  them,  the  act 
itself  having  been  done  in  their  behalf  and  interest.  Mechem, 
El.  Part.  §§  204,  201;:  Parsons,  Part.  (4th  ed.)  §§  100,  102; 


354         PARTNER'S   POWER   TO   BIND   COPARTNER 

I  Bates,  Part.  §  461;  i  Lindley,  Part.  §§  149,  150;  i  Jag. 
Torts,  §  99;  Barbour,  Part,  to  Ac.  (2d  ed. )  ch.  2,  §  13,  top 
p.  350.  The  authorities  just  cited  estabhsh  simply  that  as  a 
partnership  is  an  aggregation  of  individuals,  where  each  one 
is  the  authorized  agent  of  the  others  to  perform  any  act 
within  the  scope  of  the  partnership  enterprise,  if  one  of 
them  in  the  prosecution  of  the  business  of  the  partnership 
be  guilty  of  a  wilful  wrong  toward  another,  the  other  part- 
ners will  be  liable;  and  that  if  one  partner  is  guilty  of  an  act 
outside  of  the  partnership  business,  which  causes  an  injury, 
the  other  partners  will  not  be  liable  unless  it  appear  that 
such  act  was  expressly  authorized  by  them,  or  after  the  same 
had  been  performed  in  their  behalf  and  interest  they  had 
either  expressly  ratified  the  same  or  knowingly  received  the 
fruits  of  the  wrongful  act.  Applying  these  principles  to  the 
present  case,  the  petition  set  forth  a  cause  of  action  as 
against  the  individuals  who  compose  the  partnership  known 
as  the  Citizens'  Banking  Company,  and  the  plaintiff  has  a 
right  to  maintain  the  action,  so  far  as  the  count  for  mali- 
cious prosecution  is  concerned,  against  the  individuals  com- 
posing that  partnership.  But  the  suit  is  not  only  against  the 
individuals;  it  is  against  the  partnership  itself,  and  a  judg- 
ment is  sought  against  the  partnership  itself  as  well  as 
against  the  individual  members  who  compose  it.  It  is  well 
settled  that  a  corporation  is  liable  for  torts  committed  by  its 
agents,  such  as  assault  and  battery,  libel,  malicious  prosecu- 
tion, and  the  like.  Bchrc  v.  National  Cash  Register  Com- 
pany, 100  Ga.  213;  I  Lawson's  Rights  &  Rem.  §  367; 
Newell,  Mai.  Pros.  §  102;  Cohimbiis  &  Rome  Ry.  Co.  v. 
Christian,  97  Ga.  56;  Ga.  R.  R.  &  Bank.  Co.  v.  Richmond, 
98  Ga.  495.  Whether  a  partnership  can  be  sued  as  such  and 
held  liable  for  a  tort  in  the  commission  of  which  all  of  the 
members  united  for  the  purpose  of  furthering  the  interests 
of  the  partnership,  or  whether  in  such  a  case  the  indixiduals 
only  are  liable  to  be  sued,  either  jointly  or  severally,  is  a 
cjuestion  which  is  for  the  first  time  presented  to  this  court 


PAGE  Z-.  CITIZENS'  BANKING  CO.  355 

for  decision.  Can  a  partnership  itself  be  regarded  as  being 
so  separate  and  distinct  from  the  individual  members  of  the 
same  that  it  may  be  treated  as  the  wrong-doer,  and  a  judg- 
ment be  rendered  against  it  which  would  bind  partnership 
assets  in  the  same  manner  that  a  judgment  rendered  against 
it  on  a  contract  would  bind  such  assets? 

A  corporation  is  a  person,  and  therefore  it  is  clear  that  the 
decisions  uniformly  holding  that  it  may  be  rendered  liable 
for  a  tort  committed  by  its  agent  are  undoubtedly  sound. 
''Though  a  firm  or  partnership  is  not  a  person,  it  is  a  legal 
entity,  and,  for  some  purposes,  is  recognized  as  a  quasi 
person  having  powers  and  functions  exercisable  by  one  of 
the  partners  severally  or  all  of  them  jointly."  Drticker  v. 
JVcUhonsc,  82  Ga.  129.  In  the  opinion  in  the  case  just  cited 
'Mr.  Chief  Justice  Bleckley  says :  "A  firm  adds  nothing  to 
population,  and  in  this  respect  is  unlike  a  corporation,  which 
augments  population  in  the  legal,  though  not  in  the  natural 
world.  Still,  the  law  does  take  note,  on  a  wide  scale,  of 
partnership  as  a  legal  entity,  and  regards  it  as  a  unit  both 
of  rights  and  obligations.  Judgment  may  be  entered  and 
execution  issue  for  or  against  it.  Code,  §§  1899,  3576. 
[Civil  Code,  §§  2638,  5346.]  Attachment  may  issue 
against  it  as  non-resident,  Chambers  z's.  Sloan,  19  Ga.  84; 
DcLcon  V.  Heller,  yj  Ga.  740;  or  as  absconding,  Hines  v. 
Kimball  &  Co.,  47  Ga.  587.  It  may  be  served  with  process, 
Peel  z's.  Bryson,  J2  Ga.  332.  It  may  be  taxed.  The  Mayor 
vs.  Hines,  53  Ga.  616;  and  see  many  provisions  in  the 
session  laws  imposing  taxes.  It  may  be  insolvent.  Code, 
§  1918  [Civil  Code,  §  2660]  ;  Bennett  vs.  Woolfolk,  15  Ga. 
213  ;  Daniel  vs.  Townsend,  21  Ga.  155  ;  Piillen  vs.  Whitfield, 
55  Ga.  iy4;  Anderson  vs.  Pollard,  62  Ga.  51.  It  may  assign 
its  property  to  pay  its  creditors,  but  whether  b}-  general  law 
a  single  partner  can  make  for  it  a  general  assignment  seems 
open  to  question.  Bur.  on  Ass.  §  67  et  seq.;  Story  Par. 
§§  loi,  310;  Parsons  Par.  165,  166,  400.  As  to  restrictions 
on  limited  partnerships  in  the  matter  of  assignments,  see 


356         PARTNER'S   POWER   TO   BIND   COPARTNER 

Code,  §§  1939,  1940  [Civil  Code,  §§  2681,  2682],  Accord- 
ing to  Parsons  (Partnership,  449),  there  is  a  'general  tend- 
ency of  the  law  at  this  day  to  complete  its  recognition  of  a 
parnership  as  a  body  of  itself,  with  its  own  means  appointed 
to  its  own  debts.  In  view  of  this  tendency,  which  is  ever^-- 
where  traceable,  and  no  less  in  our  own  local  system  than 
elsewhere,  we  may  safely  hold  that  though  a  firm  or  part- 
nership is  impersonal  or  non-personal,  it  is,  for  some  pur- 
poses, in  contemplation  of  law  a  quasi  person,  having 
powers  and  functions  exercisable  by  one  of  the  partners 
severally  or  all  of  them  jointly.  That  it  may  be  a  debtor  or 
a  creditor  within  the  meaning  of  modern  statutory  enact- 
ments, we  have  no  question."  In  that  case  it  was  held  that 
an  insolvent  firm  might  make  an  assignment  as  an  insolvent 
debtor,  though  the  partners  themselves  as  individuals  might 
be  solvent.  See  also  Green  v.  WiUingham,  100  Ga.  224.  If 
a  partnership  may  be  considered  as  an  entity  so  as  to  be 
subjected  to  suit  as  such  in  the  cases  referred  to  in  the 
decision  from  which  the  above  quotation  is  made,  we  do  not 
see  why  upon  principle  a  partnership  might  not  be  treated  as 
an  entity  and  suable  as  such  by  one  who  had  been  the  subject 
of  a  wrong  committed  by  the  concurrent  action  of  all  the 
members  of  the  partnership,  in  the  prosecution  of  a  transac- 
tion instituted  and  carried  on  for  the  purpose  of  punishing 
one  who  was  charged  with  despoiling  the  partnership  of  its 
property  as  well  as  for  the  purpose  of  recovering  property 
which  was  owned  by  the  partnership.  Such  is  the  case 
made  by  that  count  in  the  petition  which  seeks  damages  for 
the  malicious  prosecution  which  it  is  distinctly  alleged  was 
instituted  and  carried  on  by  the  direct  authority  of  each  and 
every  member  of  the  partnership  acting  both  in  their  indi- 
vidual capacities  and  as  members  of  the  firm. 

It  has  been  held  that  if  one  partner  maliciously  prose- 
cutes a  person  for  stealing  partnership  property,  the  firm  is 
not  answerable,  unless  all  the  members  are  in  fact  privy  to 
the  malicious  prosecution.     Arbuckle  v.  Taylor,   3   Dowl. 


A 


PAGE  z'.  CITIZENS'  BANKING  CO.  357 

1 60,  cited  in  Newell  on  Malicious  Prosecution,  §   103.     It 
would  seem  to  follow  from  this  ruling,  that  if  all  of  the 
members  united  in  instituting  and  carrying  on  the  prosecu- 
tion, the  firm  would  be  answerable ;  and  such  are  the  allega- 
tions in  the  present  case.    In  nearly  all  of  the  cases  where  it 
is  sought  to  hold  the  partnership  liable   for  a  tort,   upon 
examination  of  the  fates  it  will  be  found  that  the  suit  was 
not  against  the  partnership  as  such,  but  was  against  one  or 
more  members  thereof  sued  severally  or  jointly,  as  the  case 
may  be.     See  Durant  z'.  Rogers,  87  111.  508 ;  Rosenkrans  z'. 
Barker,  3  N.  E.  (111.)  93;  Farrell  v.  Friedlander,  18  N.  Y. 
Supp.  215;  United  States  v.  Thomason,  4  Bissell,  99.     In 
some  of  the  cases  just  cited  it  was  ruled  that  under  the  facts 
of  the  case  the  partnership  was  liable,  and  in  others  that  it 
was  not.     Attention  is  called  to  them  for  the  purpose,  as 
above  indicated,   of   showing  that  they  are  not  authority 
either  way  on  the  proposition   as   to   whether  a   partner- 
ship can  be  sued  as  such  for  a  tort.     In  Schwabacker  v. 
Riddle,  84  111.   517,  it  was  held:    "Partners  are  liable  in 
solido  for  the  torts  of  one,  if  committed  by  him  as  a  partner 
and  in  the  course  of  the  business  of  the  partnership."     A 
ruling  in  almost  identical  language  was  made  in  Mcllroy  r. 
Adams,  32  Ark.  315.     Upon  examination  of  these  cases  it 
will  be  found  that  the  suit  in  each  instance  was  against  the 
individuals  and  not  against  the  partnership.     In  the  matter 
of  Ketchum  and  others.  Bankrupts,  i  Fed.  Rep.  815,  it  was 
held  that  a  firm  was  liable  if  one  of  its  members  converted 
to  the  use  of  the  firm  the  property  of  another,  and  that  it 
was  immaterial   whether  the   other  members   of   the   firm 
were  ignorant  of  the  wrong  or  innocent  of  any  wrongful 
intent.     There  was  in  that  case,  however,  no  ruling  as  to 
how  a  suit  for  such  wrongful  conversion  should  be  brought, 
whether  against  the  partnership  as  such  or  against  the  indi- 
viduals composing  the  same.     The  only  cases  to  which  our 
attention  has  been  called  in  which  the  partnership  as  sujh 
was  sued  for  a  tort  are  the  cases  of  Mark  v.  Hastings.  13 


358         PARTNER'S   POWER   TO   BIND   COPARTNER 

So.  Rep.  (Ala.)  297,  and  Kirk  v.  Garrett,  84  Md.  383.  In 
the  former  it  was  held :  "A  partner  is  not  liable  for  a  mali- 
cious prosecution  instituted  by  his  copartner  on  a  charge  of 
larceny  of  partnership  property,  unless  he  advises  or  directs 
it,  or  participates  therein,  and  then  only  in  his  individual 
capacity."  In  the  latter  case  it  was  held  that  under  the  facts 
of  that  case  the  firm  was  not  liable,  but  the  judge  who  wrote 
the  opinion  recognized  that  there  were  cases  in  which  it 
might  be  held  liable  for  the  torts  of  its  members.  See  page 
410.  While  the  prosecution  of  a  person  for  a  criminal 
offense  might  not  be  within  the  scope  of  a  mercantile  part- 
nership, even  though  such  offense  consisted  of  a  larceny  of 
the  partnership  property,  as  was  held  in  the  Alabama  case, 
supra,  still  it  would  seem  that  any  proceeding  authorized  by 
law  for  the  purpose  of  reclaiming  property  of  the  partner- 
ship which  had  been  stolen  would  be  within  the  scope  of  the 
partnership  business,  and  each  partner  would  be  authorized 
to  use  such  remedies  as  the  law  gave  for  that  purpose ;  and 
if  these  remedies  were  pursued  maliciously  and  without 
probable  cause  and  a  prosecution  for  a  public  offense  re- 
sulted therefrom,  the  partnership  as  such  would  be  liable  in 
an  action  of  malicious  prosecution.  But  be  this  as  it  may,  it 
is  not  necessary  for  us  to  decide  this  question  in  the  present 
case,  for  the  allegations  of  the  petition  are  clear  and  distinct 
that  every  act  that  was  done  by  the  partner  who  sued  out 
the  search  warrant  was  authorized  and  directed  by  each  and 
every  other  member  of  the  firm  acting  in  behalf  of  the  part- 
nership. Treating  the  partnership  as  a  legal  entity  and  as  a 
quasi  person,  as  we  are  not  only  authorized  but  bound  to  do, 
following  the  decision  in  Druckcr  V.  Wcllhoiise,  supra,  we 
have  no  hesitancy  in  holding  that  under  the  allegations  of 
the  petition  an  action  for  malicious  prosecution  was  main- 
tainable against  the  Citizens'  Banking  Company  as  a  part- 
nership, and  that  the  plaintiff  is  entitled  under  his  allega- 
tions to  recover  a  judgment  which  will  bind  partnership 
assets. 

Judgment  reversed. 


MANUFACTURERS'  &  MECHANICS'  BANK  v.  GORE   359 


SECTION  4.— LIABILITY   IN    QUASI  CONTRACT 
AND  IN   EQUITY. 


MANUFACTURERS'  AND  MECHANICS'   BANK  v. 

GORE. 

In   the   Supreme   Judicial   Court   of   Massachu- 
setts,  1818. 

15  Massachusetts  Reports,  75.' 

Parker,  C.  J.,  delivered  the  opinion  of  the  Court. — 
We  think  the  principle,  that  when,  by  means  of  a  felony, 
one  has  been  deprived  of  his  property,  the  civil  remedy  is 
merged  in  the  felony,  if  existing  in  full  force  in  this  coun- 
try, in  the  manner  laid  down  in  some  of  the  English  author- 
ities, does  not  apply  to  this  action ;  which  is  not  founded 
upon  a  felony,  but  upon  a  common  contract  for  the  loan 
of  money,  in  which  the  lender  has  been  deceived  by  the 
borrower,  and  deprived  of  the  security  upon  which  the  loan 
was  assented  to.  How  far  the  principle  may  be  applicable 
to  a  different  class  of  these  unfortunate  cases,  which  have 
been  argued  at  the  present  term,  we  do  not  determine;  as 
those  actions  are  too  important  in  their  consequences  to  be 
decided  while  a  particle  of  doubt  remains  in  the  minds  of 
any  of  the  Court. 

The  facts  in  this  case  show  that  the  defendant  Grafton 
proposed  to  the  bank  to  present  a  note,  in  which  he  and 
his  partner  should  be  promisors,  and  Mr.  dishing  and  Mr. 
Scuddcr  endorsers,  for  discount;  that,  the  proposal  being 
agreed  to,  a  note  was  made  by  Grafton,  in  the  name  of 
the  house  of  Gore  &  Grafton,  purporting  to  be  payable  to 
Thomas  Gushing;  that  Grafton,  having  forged  the  names 
of  the  supposed  endorsers,   presented   it   to   the  bank   for 

'The  Reporter's  statement  of  the  facts  is  omitted. 


360         PARTNER'S   POWER   TO    BIXD   COPARTNER 

discount;  and  that  the  amount,  deducting  the  discount, 
was  passed,  in  the  bank  books,  to  the  credit  of  Gore  & 
Grafton,  they  being  indebted  to  the  bank  on  other  notes 
previously  given  in  the  same  manner,  on  which  similar 
forgeries  had  been  committed  by  Grafton.  [Gore  did  not 
have  any  knowledge  of  Grafton's  crimes.] 

The  bank,  findiiig  the  security  upon  which  they  had 
agreed  to  make  the  loan  had  failed,  by  reason  of  the  for- 
gery of  the  names  of  the  endorsers,  and  that  they  had  thus 
been  defrauded  of  a  large  sum  of  money,  commenced  this 
action,  declaring  for  money  had  and  received,  and  for 
money  lent  and  accommodated,  although  the  term  of  credit 
agreed  upon  the  loan  had  not  expired.  They  do  not  claim 
tlirough  the  crime  of  Grafton;  and  it  is  immaterial  to  them, 
for  the  purposes  of  this  suit,  whether  the  security  failed 
because  of  the  forgery,  or  because  the  ability  of  the  en- 
dorsers was  not  such  as  may  have  been  represented,  to  in- 
duce them  to  make  the  loan. 

It  is  a  case,  as  respects  the  plaintiffs,  of  money  ob- 
tained from  them  by  misrepresentation  and  fraud;  and  we 
think  the  only  question  is,  whether,  upon  a  loan  thus  ob- 
tained, although  upon  credit,  the  bargain  may  not  be  dis- 
affirmed by  the  lender,  and  an  action  presently  commenced 
for  money  so  obtained,  as  had  and  received,  in  a  legal 
view,  to  his  use.  And  upon  this  point  we  have  no  doubt; 
and  we  believe  the  doctrine  has  been  generally  received 
and  practised  upon  in  this  commonwealth,  that,  when  goods 
are  purchased  upon  credit,  or  money  borrowed,  and  the 
security  agreed  upon  by  the  parties  turns  out  to  be  of  no 
value,  and  different  from  what  it  was  represented  to  be  by 
the  debtor,  it  may  be  treated  as  a  nullity,  and  an  action 
will  lie  immediately  for  the  sum  it  was  intended  to  secure. 

T~  'p  -T^  't* 

The  case,  then,  is  too  clear  to  be  doubted,  as  it  re- 
spects Grafton,  in  the  enormous  frauds  committed  upon 
those  with  whom  he  dealt.     How  does  it  stand  with  re- 


MANUFACTURERS'  &  MECHANICS'  BANK  v.  GORE   361 

spect  to  Gore,  the  innocent  victim? — We  regret  to  say, 
equally  clear.  The  partnership  was  general.  Grafton  was 
the  business  man  out  of  the  store;  all  the  business  at  the 
banks,  and  in  obtaining  credits  of  individuals,  was  managed 
by  him.  He  had  full  right  to  bind  the  firm  to  any  extent, 
in  contracts  for  the  use  of  the  partnership.  The  proceeds 
of  these  very  notes  were  placed  to  the  credit  of  the  house 
in  the  books  of  the  bank,  and  actually  went  to  their  use, 
to  pay  preexisting  debts  in  the  bank.  So  the  jury  must 
have  found;  and  the  facts  warrant  the  finding.  We  con- 
sider the  direction  of  the  judge  on  both  points  correct  in 
point  of  law,  and  that  the  verdict  was  a  necessary  result 
from  the  facts  proved  in  the  case. 
Judgment  on  the  verdict.^ 


*  Compare:  Strang  v.  Bradncr,  114  U.  S.  555,  1884.  (The  Bankrupt 
Act  of  1867  excepted  from  the  operation  of  a  discharge  any  "debt 
created  by  the  fraud  *  *  *  Qf  ^]^^  bankrupt."  D  and  E  were  part- 
ners in  the  wool  commission  business.  A,  B  and  C  were  partners  m 
the  business  of  purchasing  wool,  which  they  sent  to  D  and  E  to  sell 
for  their  account.  D  and  E,  for  the  accommodation  of  A,  B  and  C, 
sent  to  them  from  time  to  time  notes  on  which  A,  B  and  C 
raised  money  for  their  own  use.  D  and  E  met  the  notes  at  maturity  out 
of  the  proceeds  of  the  sale  of  the  wool  and  out  of  their  own  funds,  cred- 
iting A.  B  and  C  with  the  notes,  and  the  price  received  for  the  wool, 
and  debiting  them  with  the  amounts  paid  on  the  notes.  A,  B  and  C 
asked  D  and  E  for  four  notes  of  about  $4000  each.  The  notes  were 
sent  and  also  a  consignment  of  wool.  A,  without  the  knowledge  of  B 
and  C,  wrote  in  the  name  of  the  firm  to  D  and  E,  saying  that  the  notes 
could  not  be  used  and  asking  for  others  in  their  place.  D  and  E  com- 
plied with  this  request.  A  placed  both  sets  of  notes  in  circulation,  and 
the  proceeds  of  both  sets  of  notes  went  into  the  business  of  A.  B  and 
C.  A,  B  and  C  were  declared  bankrupts.  D  and  E  had  to  meet  all  the 
notes  at  maturity.  A,  B  and  C  were  discharged.  D  and  E  brought  a 
suit  against  A,  B  and  C  for  the  amount  lost  as  a  result  of  their  sending 
the  second  series  of  notes.  The  defendants  pleaded  their  discharge.  On 
appeal,  held,  that  the  discharge  could  not  be  pleaded  by  any  of  the 
defendants.  Harlan,  J.:  "Whether  this  action  be  regarded  as  one  to 
recover  damages  for  the  deceit  practised  upon  the  plaintiffs,  or  as  one 
to  recover  the  amount  of  a  debt  created  by  fraud  upon  the  part  of  [.\], 
we  are  of  opinion  that  his  fraud  is  to  be  imputed,  for  the  purposes  of 
this  action,  to  all  the  members  of  the  firm."  P.  561.  yoic.  that  the 
Bankrupt  Act  of  i8g8  provides  that  a  discharge  ^hall  release  the 
bankrupt  from  all  debts  except  such  as  "(.2)  are  liabilities  for  obtaining 
property  by  false  pretenses  or  false  representations  *  *  *  ;  or  (4) 
were  created  by  his  fraud,  embezzlement,  misappropriation,  or  defalca- 
tion while  acting    *    *    *    in  any  fiduciary  capacity.") 


362         PARTNER^S   POWER  TO    BIND   COPARTNER 


Ex  Parte  HEATON. 
In  the  High  Court  of  Chancery,  1819. 

I  Buck's  Cases  in  Bankruptcy,  386. 

Moxon  and  his  two  sons  carried  on  business  together 
in  partnership.  The  sons  were  trustees  named  in  a  will 
for  the  sale  of  certain  real  estates.  They  sold  the  estates, 
and  instead  of  applying  the  monies  arising  from  the  sales 
according  to  the  trusts  of  the  will,  they  appropriated  them 
to  partnership  purposes.  A  commission  of  bankrupt  is- 
sued against  Moxon  and  his  two  sons,  and  it  was  admitted 
that  there  was  not  any  separate  estate.  This  was  a  peti- 
tion on  behalf  of  the  cestui  que  trusts,  who  were  infants, 
by  their  father,  to  prove  against  the  joint  estate,  the  amount 
of  the  monies  so  appropriated  by  the  sons.^ 
The  Vice  Chancellor  [Sir  John  Leach]  : 
Those  who  receive  trust  property  from  a  trustee,  in 
breach  of  his  trust,  become  themselves  trustees,  if  they 
have  notice  of  the  trust.  If  the  monies  arising  from  the 
sale  of  these  trust  estates  were  applied  to  the  partnership 
purposes  with  the  knowledge  of  Moxon,  the  father,  the 
firm  would  become  implied  trustees,  and  then  the  cestui  que 
trusts  might  proceed  either  against  the  sons,  as  actual  trus- 
tees, or  against  the  firm,  as  implied  trustees;  but  there  is 
no  evidence  that  the  funds  were  so  appropriated  with  the 
knowledge  of  the  father.  I  shall  therefore  direct  an  in- 
quiry as  to  that  fact.^ 


*  The  Reporter's  notes  of  the  argument  of  counsel  for  the  petition  are 
omitted,  as  is  that  portion  of  the  opinion  of  the  Court  which  deals  with 
a  question  arising  out  of  the  infancy  of  one  of  the  trustees. 

'  In  accordance  with  the  intimation  in  our  principal  case,  where  one 
partner,  with  the  knowledge  of  his  co-partners,  brings  into  the  firm  as 
his  contribution  to  the  capital  monies  which  he  holds  as  trustee,  the 
cestui  que  trust  may  obtain  in  a  bill  brought  against  all  the  partners  an 
accounting  for  all  the  profits  made  by  the  improper  employment  of  the 
funds  of  the  trust  in  trade.    Flockton  v.  Bunning,  L.  R.  8  Ch.  App.  Cas. 


EX  PARTE  HEATON  363 

2,22,,  note,  1864.  Where  money  belonging  to  a  trust  estate  is  improperly 
loaned  by  the  trustee  to  a  firm,  though  the  members  of  the  firm  are  cog- 
nizant of  the  breach  of  trust,  they  cannot  be  made  to  account  in  equity 
for  the  profits  made  in  the  business  as  a  result  of  the  use  of  the  money; 
they  are  merely  liable  for  the  return  of  the  loan  with  interest:  Stioud 
V.  Gwyer,  28  Beav.,  130,  i860,  per  Romilly,  M.  R.,  p.  141 ;  Rau  v.  Small, 
144  Pa.  304,  1891.  In  the  Pennsylvania  case  cited  the  trustee  loaning  tjie 
money  was  a  member  of  the  firm.  Where  this  is  the  case  the  trustee  is 
himself  liable  for  the  profits  he  has  received  as  a  member  of  the  firm  as 
a  result  of  the  use  of  the  money;  but  he  is  not  liable  for  the  profits 
received  by  the  firm  or  his  co-partners.  Vyse  v.  Foster,  L.  R.  8  Ch.  App. 
Cas,  309,  1870;  Seguin's  App.,  103  Pa.  139,  1883.  As  a  man  who  borrows 
for  the  purposes  of  trade  money  from  a  trustee  is  not  according  to  these 
cases  regarded  as  a  constructive  trustee  of  the  profits  which  he  makes 
as  a  result  of  the  use  of  money,  a  fortiori  it  would  be  impossible, 
where  one  or  more  of  the  partners  were  ignorant  of  the  impropriety  of 
the  loan,  to  make  the  firm  or  the  innocent  partners  account  for  the 
profits  made  in  the  use  of  the  money. 


364         PARTNER'S   POWER   TO   BIND   COPARTNER 


MARSH  z'.  KEATING. 
In  the  House  of  Lords,  1834. 

2  Clark  and  Finnelly's  Reports,  250. 

An  action  of  assumpsit  for  money  had  and  received 
brought  by  Ann  Keating  against  WilHam  Marsh,  J.  H. 
Stracey,  and  George  Graham.  By  the  special  verdict, 
taken  by  consent,  the  following  facts  were  found : 

The  defendants,  with  one  Henry  Fauntleroy,  were 
partners  in  the  banking  business,  trading  as  Marsh  &  Co. 
Ann  Keating  owmed  12, cool,  interest  or  share  in  the  joint 
stock  called  Reduced  Three  per  Cent.  Annuities  of  the 
Bank  of  England.  She  gave  to  Marsh  &  Co.  a  power  of 
attorney  to  collect  the  interest  on  the  stock.  The  business 
of  Marsh  &  Co.  was  transacted  by  Fauntleroy.  He  or- 
dered T.  B.  Simpson,  a  stock  broker,  to  sell  9000I.  of  the 
Annuities  standing  in  the  name  of  Ann  Keating;  the  Annui- 
ties were  transferred  into  the  name  of  the  purchaser,  W. 
B.  Tarbutt,  by  the  Bank  at  the  direction  of  Fauntleroy, 
the  latter  presenting  to  the  Bank  a  power  of  attorney,  which 
purported  to  be  signed  by  Ann  Keating,  authorizing  the 
defendants  and  Fauntleroy  jointly  and  each  of  them  sev- 
erally to  transfer  9000I.  of  her  Annuities  to  Tarbutt.  The 
signature  to  the  power  of  attorney  was  a  forgery.  Faunt- 
leroy received  from  Simpson  a  check  to  the  order  of  Marsh 
&  Co.  for  6,0131.  2s.  6d.,  being  the  amount  paid  by  Tar- 
butt less  one-half  the  usual  broker's  commissions.  The 
firm  of  Marsh  &  Co.  kept  an  account  with  IMartin,  Stone 
&  Co.,  bankers.  Fauntleroy  deposited  the  check  received 
for  the  sale  of  the  Annuities  with  Martin,  Stone  &  Co., 
the  latter  crediting  the  amount  to  Marsh  &  Co.  as  "cash 
per  Fauntleroy"  on  the  pass  book  of  the  firm.  The  trans- 
action, however,  was  never  noted  on  any  other  book  of 


MARSH  V.  KEATING  365 

account  kept  by  the  firm.  The  defendants  were  ignorant 
of  the  forgery  of  Faiintleroy.  Fauntleroy  paid  in  and 
drew  out  of  Martin,  Stone  &  Co.  in  the  name  of  Marsh 
&  Co.  considerable  sums  for  his  own  individual  use.  These 
transactions,  like  the  deposit  of  the  money  received  from 
Simpson,  appeared  on  the  pass  book  of  the  firm  of  Marsh 
&  Co.,  but  did  not  appear  in  any  other  account  book  of 
the  firm.  Fauntleroy  was  indicted  for  other  forgeries, 
found  guilty  and  executed. 

The  defendants  were  bankrupts.  The  present  action 
was  brought  as  a  result  of  a  direction  of  the  Lord  Chancel- 
lor, in  order  to  determine  whether  Ann  Keating,  who  had 
proved  her  debt  under  the  commission,  should  have  her 
proof  expunged. 

Judgment  was  entered  in  the  Court  of  King's  Bench, 
without  argument,  for  the  plaintiff.  This  judgment,  also 
without  argument,  was  affirmed  by  the  Exchequer  Cham- 
ber. 

The  Defendants  below  accordingly  brought  their  Writ 
of  Error  in  Parliament.  The  Lords  having  considered  the 
case  proper  for  the  assistance  of  the  Common  Law  Judges, 
the  following  learned  Judges  attended  the  House  during 
the  arguments :  Chief  Justice  Tindal,  Mr.  Justice  Park, 
Mr.  Baron  Bayley,  Justices  Bosanquet,  Gaselee,  Littledale, 
Taunton,  Vaughan.  J.  Parke,  and  Patteson,  and  Barons 
Bolland  and  Gurney.^ 

The  Lord  Chancellor  moved  the  postponement  of  the 
case  for  further  consideration. 

His  Lordship  then  suggested  the  points  which  he  rec- 
ommended to  be  comprised  in  the  questions,  which  are 
stated  in  the  subjoined  opinion. 

Mr.  Justice  Park  now  delivered  the  opinion  of  the 
Judges : — The  question  which  your  Lordships  have  been 
pleased  to  propose  for  the  opinion  of  His  Majesty's  Judges, 
amounts   in   substance   to   this, — whether   the    produce   of 

^  The  facts  are  restated,  and  the  arguments  of  counsel  omitted. 


366         PARTNER'S   POWER  TO    BIND   COPARTNER 

Stock  formerly  standing  in  the  name  of  Mrs.  Ann  Keating, 
the  Plaintiff  below,  but  transferred  out  of  her  name  on 
the  29th  of  December  1819,  without  her  authority,  and 
under  a  power  of  attorney  which  had  been  forged  by  one 
of  the  partners  of  the  Defendants  below,  the  bankers  of 
Mrs.  Keating,  which  partner  has  been  since  convicted  and 
executed  for  another  forgery,  can,  under  the  circumstances 
stated  in  the  special  verdict,  be  considered  as  money  had 
and  received  by  the  surviving  partners  to  the  use  of  the 
Plaintiff  below,  and  be  recovered  by  her  in  that  form  of 
action.  And  after  hearing  the  argument  at  your  Lord- 
ships' bar,  and  consideration  of  the  facts  stated  in  the 
special  verdict,  all  the  Judges  who  were  present  at  the 
argument,  including  the  Lord  Chief  Justice  of  the  Com- 
mon Pleas,  who  is  absent  at  Nisi  Prius,  and  Mr.  Baron 
Bayley,  who  has  resigned  his  office  since  the  argument, 
agree  in  opinion  that  such  question  is  to  be  answered  in 
the  affirmative.     *     *     *" 

The  general  proposition,  that  where  a  party  who  has 
been  injured  has  different  remedies  against  different  per- 
sons, he  may  elect  which  of  them  he  will  pursue,  is  not 
called  in  question.  If  the  goods  of  A  are  wrongfully  taken 
and  sold,  it  is  not  disputed  that  the  owner  may  bring 
trover  against  the  wrong-doer,  or  may  elect  to  consider 
him  as  his  agent,  may  adopt  the  sale,  and  maintain  an  ac- 
tion for  the  price;  but  it  is  objected  that  such  general  rule 
will  not  apply  to  the  present  case,  on  various  grounds 
of  objection  which  have  been  advanced  on  the  parts  of  the 
Defendants  in  the  action. 

Those  objections  appear  to  resolve  themselves  sub- 
stantially into  four:  first,  it  has  been  urged  that  the  trans- 
fer in  this  case  being  an  act  not  voidable  only,  but  abso- 
lutely void,  it  is  incapable  of  being  confirmed  by  any  vol- 


'  His  discussion  of  the  contention  that  Mrs.  Keating  had  not  suffered 
any  loss,  as  the  transfer  under  the  forged  power  was  a  nullity,  is 
omitted.  The  opinion  of  the  judges  on  this  point  was  against  the 
plaintiffs  in  error. 


MARSH  V.  KEATING  367 

untary  election  of  the  party  who  has  made  it ;  secondly, 
that  at  all  events,  in  this  case  such  election  is  taken  away, 
upon  grounds  of  public  policy;  for  that  the  sale  of  the 
stock  having  been  made  through  the  medium  of  a  felony, 
to  allow  the  maintenance  of  this  action  would,  in  effect,- 
be  to  affirm  a  sale  completed  through  a  felony,  and  would 
give  the  Plaintiff  a  right  of  action  arising  immediately  out 
of  the  felony  itself;  thirdly,  that  it  does  not  appear  from 
the  facts  found  in  the  special  verdict,  that  the  money  pro- 
duced by  the  sale  of  stock  came  into  the  hands  of  the 
Defendants  below  under  such  circumstances  as  would  •con- 
stitute it  money  had  and  received  by  the  Defendants  below 
to  the  use  of  the  Plaintiff;  and  lastly,  that  by  the  subse- 
quent transactions  between  the  Plaintiff  and  the  Bank  of 
England,  she  has  lost  any  right  of  action  against  the  De- 
fendants, if  she  ever  possessed  it.     *     *     *3 

But  it  is  objected,  thirdly,  that  the  proceeds  of  tlie 
sale  of  the  stock  never  came  into  the  hands  of  the  Defend- 
ants below,  so  as  to  be  money  received  by  them  to  the  use 
of  the  Plaintiff;  and  the  consideration  of  this  objection 
involves  two  questions :  First,  did  the  money  actually  come 
into  the  possession  of  the  Defendants?  Secondly,  if  it 
ever  was  in  their  possession,  had  the  Defendants  the  means 
of  knowledge,  whilst  it  remained  in  their  hands,  that  it 
was  the  money  of  the  Plaintiff  and  not  the  money  of  Faunt- 
leroy?  As  to  the  first  point,  the  special  verdict  finds  ex- 
pressly, that  Simpson,  the  broker,  paid  the  sum  of  6,013/. 
2s.  6d.,  being  the  amount  of  the  sum  received  from  Tar- 
butt  (deducting  one-half  of  the  usual  commission),  by  a 
cheque  payable  to  Marsh  &  Co.,  into  the  hands  of  ]\Iartin 
&  Co.,  to  the  account  of  Marsh  &  Co.,  at  the  precise  time 
of  such  payment;  therefore,  there  can  be  no  doubt  but  that 
it  was  as  much  money  under  their  control  as  any  other 
money  paid  in  at  Martin  &  Co.'s,  by  any  customer  under 

'Only  so  much  of  the  remainder  of  (he  opinion  of  the  judges  as 
relates  to  the  third  objection  is  reprinted.  The  judges  were  of  the 
opinion  that  the  other  objections  were  not  well  founded. 


368      .   PARTNER'S   POWER   TO    BIND   COPARTNER 

ordinary  circumstances.  The  house  of  Marsh  &  Co.  might 
have  drawn  the  whole  of  the  balance  into  their  own  hands : 
if  the  same  money  had  been  paid  into  Martin  &  Co.'s,  as 
the  produce  of  the  Plaintiff's  stock,  sold  under  a  genuine 
power  of  attorney,  it  would  unquestionably  have  been  re- 
ceived by  all  the  Defendants  to  the  use  of  the  Plaintiff. 
It  would  not  the  less  be  money  received  by  the  partners 
of  the  firm,  because  (as  found  in  the  special  verdict)  it 
was  entered  in  the  account  as  "Cash  per  Fauntleroy ;''  or 
because  it  never  appeared  in  the  house-book  or  any  other 
book  of  Marsh  &  Co.,  but  only  in  the  pass-book  of  that 
firm  with  Martin  &  Co. ;  or  because  it  never  came  into 
the  yearly  balancing  of  the  house  of  Marsh  &  Co.,  or  iji 
any  other  manner  into  their  books.  Those  several  circum- 
stances prove  no  more  than  that  Fauntleroy,  one  of  the 
partners,  deceived  the  others,  by  preventing  the  money 
from  being  ultimately  brought  to  the  account  of  the  house; 
but  as  between  them  and  the  person  by  the  sale  of  whose 
stock  it  was  produced,  we  think  the  fraud  of  their  part- 
ner Fauntleroy,  in  the  subsequent  appropriation  of  the 
money,  affords  no  answer  after  it  had  once  been  in  their 
power;  and  that  it  was  so,  appears  to  be  distinctly  stated 
in  the  special  verdict. 

But  it  is  urged,  that  the  present  Defendants  had  no 
knowledge  that  the  money  was  the  property  of  the  Plain- 
tiff, being  perfectly  ignorant,  as  the  special  verdict  finds, 
of  the  commission  of  the  forgery,  of  the  sale  of  the  stock, 
or  the  payment  of  the  produce  of  such  sale  into  their  ac- 
count at  Martin  &  Co.'s.  It  must  be  admitted,  that  they 
were  so  far  imposed  upon  by  the  acts  of  their  partner,  as 
to  be  ignorant  that  the  sum  above  mentioned  was  the  pro- 
duce of  the  Plaintiff's  stock;  but  it  is  equally  clear  that 
the  Defendants  might  have  discovered  the  payment  of  the 
money,  and  the  source  from  which  it  was  derived,  if  they 
had  used  the  ordinary  diligence  of  men  of  business.  If 
they  had  not  the  actual  knowledge,  they  had  all  the  means 


MARSH  V.  KEATING  369 

of  knowledge;  and  there  is  no  principle  of  law  upon  which 
they  can  succeed  in  protecting  themselves  from  responsi- 
bility, in  a  case  wherein,  if  actual  knowledge  was  neces- 
sary, they  might  have  acquired  it  by  using  the- ordinary 
diligence  which  their  calling  requires. 

^  Hf  jjc  ' 

Upon  the  whole,  therefore,  we  beg  to  state  our  opin- 
ion to  be,  that  upon  the  question  which  has  been  proposed 
to  us  by  your  Lordships,  ]Mrs.  Keating  has  the  right  to 
recover  the  produce  of  her  stock  against  the  surviving 
partners  of  the  firm  who  received  it,  under  the  circum- 
stances stated  in  the  special  verdict  in  an  action  for  money 
had  and  received  to  her  use. 

The  Lord  Chief  Justice  of  the  Common  Pleas  desires 
it  to  be  expressly  understood,  that  he  fully  concurs  in  the 
opinion  now  delivered. 

The  Lord  Chancellor  coming  into  the  House  said: 
*     *     * 

The   learned   Judges   have    all    agreed   in   opinion,    in 

support  of  the  judgment  below.     I  therefore  move  your 

Lordships  that  that  Judgment  be  affirmed;  but  at  the  same 

time  without  costs,  in  consideration  of  the  importance  of 

the  question,  and  the  opinion  of  the  Court  below  having 

been   in   favour   of   taking  the   sense   of   your   Lordships' 

House. 

Judgment  affirmed  without  costs. 


370         PARTNER'S   POWER  TO    BIXD   COPARTNER 


BLAIR  V.  BROMLEY. 
In  the  High  Court  of  Chancery,  1847. 

2  Phillip's  Chancery  Reports,  354. 

In  the  year  1820,  JVilliain  Bromley,  who  had  for  many- 
years  previously  carried  on  business  as  an  attorney  and 
soHcitor  at  Gray's  Inn,  took  his  brother,  the  defendant 
Joseph  Walter  Bromley,  into  partnership  with  him,  the 
terms  of  the  partnership  being  that  the  latter  should  ad- 
vance 1000/.,  which  was  to  be  repaid  to  him  at  the  expira- 
tion of  five  years,  during  which  he  was  to  be  paid  a  salary 
as  clerk  in  lieu  of  a  share  of  profits ;  and  that  from  and 
after  that  time  he  should  be  interested  in  one-third  of  the 
])rofits  and  losses  of  the  concern  as  a  partner.  That  ar- 
rangement was  acted  upon  in  all  respects,  and  an  account 
which  William  Bromley  then  kept  with  Messrs.  Rogers, 
Twogood  and  Co.  bankers  in  London,  and  in  which  there 
was  a  considerable  balance  standing  to  his  credit,  was 
transferred  into  the  joint  names  of  the  two  brothers.  In 
the  apportionment  of  the  business  between  the  partners,  the 
agency  business  was  undertaken  by  Joseph  Walter  Bromley, 
while  his  brother  reserved  to  himself  the  exclusive  man- 
agement of  the  concerns  of  those  individual  clients  whom 
he  then  had  or  might  afterwards  procure  by  means  of  his 
personal  connection. 

Among  other  clients  of  that  description  was  one 
Thomas  Blair,  who  died  in  1828;  after  which,  the  plain- 
tiffs, who  were  his  executors,  continued  in  that  character 
to  employ  the  Messrs.  Bromley  as  their  solicitors  in  all 
matters  connected  with  the  trust,  and,  amongst  others,  in 
the  investment  of  moneys  belonging  to  the  estate,  the  in- 
come of  which  was  given  by  the  testator  to  his  widow  for 
her  life.     In  the  year  1829.  having  been  informed  by  Wil- 


BLAIR  '.■.  BROMLEY  371 

Ham  Bromley  that  he  had  an  opportunity  of  investing  a 
sum  of  4500/.  as  mortgage  of  an  estate  of  a  Mr.  Scabrook, 
the  plaintiffs,  who  resided  at  Bath,  drew  a  cheque  for  that 
amount  on  the  executors'  account  at  the  Bank  of  England, 
crossed  with  the  names  of  Messrs.  Rogers,  Twogood  and 
Co.,  and  made  payable  to  Seahrook  or  bearer,  and  enclosed 
the  same  in  a  letter  to  William  Bromley,  with  instructions 
to  invest  the  amount  on  the  proposed  mortgage.  The 
cheque  was  duly  presented  by  Messrs.  Rogers  and  Co.,  and 
the  amount  was  received  and  placed  by  them  to  the  credit 
of  the  account,  at  their  bank,  of  the  Messrs.  Bromley. 
The  mortgage  transaction  went  on  between  JVilliam  Brom- 
ley and  Mr.  Scabrook,  and  was  on  the  point  of  being  com- 
pleted, when  it  was  broken  off  by  the  latter,  and  the  money 
was  never  invested.  JJ^illiam  Bromley,  however,  not  only 
concealed  that  fact  from  the  Plaintiffs  and  INIrs.  Blair,  but 
in  several  accounts,  which  he  rendered  to  them  from  time 
to  time  at  their  request,  of  the  investments  he  had  made 
for  them,  he  included  this  sum  of  4500/.  as  invested  on 
Seabrook's  mortgage ;  and  in  the  sums  which  he  from  time 
to  time  transmitted  to  Mrs.  Blair  as  interest  on  the  invest- 
ments which  he  had  been  employed  to  make,  he  regularly 
included  the  amount  of  interest  at  5  per  cent,  upon  the 
4500/.  as  if  it  had  been  actually  invested. 

In  the  year  1834  the  partnership  between  the  Messrs. 
Bromley  was  dissolved  by  mutual  consent ;  the  accounts 
between  them  were  settled ;  and  the  balance  then  stand- 
ing to  the  joint  account  with  Messrs.  Rogers  and  Co.  was 
transferred  to  the  separate  account  of  JVilliam  Bromley, 
who  continued  to  carry  on  his  business  upon  the  same 
premises,  and  to  act  as  solicitor  for  the  Plaintiffs  and  the 
Blair  family  in  the  same  manner  as  before,  except  that  in 
the  subsequent  communications  with  him  the  name  of  the 
partnership  firm  was  dropped.  Mrs.  Blair  died  in  the  year 
1841,  after  which  the  payments  of  interest  on  the  aggre- 
gate amount  of  the  supposed  investments  fell  into  arrear; 


372         PARTNER'S   POWER   TO    BIND   COPARTNER 

and  in  1844  IVilliam  Bromley  became  bankrupt,  the  non- 
investment  of  the  4500/.  was  discovered,  and  this  bill  was 
filed  against  /.  W.  Bromley  to  make  him  liable  for  that 
sum,  with  the  arrears  of  interest  at  5  per  cent. 

The  defence  set  up  by  the  answer,  and  the  truth  of 
which,  in  point  of  fact,  was  satisfactorily  established  by 
the  evidence,  was,  that  no  part  of  the  sum  in  question 
had  ever  actually  come  to  the  hands  of  the  defendant,  and 
that  he  had  never  had  any  personal  knowledge  of  the 
transaction,  or  any  personal  communication  with  the  De- 
fendants, or  any  of  the  Blair  family  in  reference  to  it,  the 
whole  of  the  business  having  been  under  the  sole  and  ex- 
clusive management  of  William  Bromley.^ 

Lord  Chancellor  Cottenham  : 

In  this  case  the  payment  of  the  4500/.  into  the  funds 
of  Williaui  Bromley  and  his  partner,  for  the  purpose  of 
investment,  is  proved,  and  their  liability  admitted.  After- 
wards Mr.  Bromley,  one  of  the  partners,  representing  that 
it  had  been  invested,  paid  sums  equal  to  the  interest,  and 
made  a  charge  in  a  bill  of  costs  for  some  of  the  expenses 
incident  to  such  investment. 

Whether  the  Defendant  knew  of  the  transaction  or 
not,  he  certainly  had  the  means  of  knowing  it.  But  neither 
is  necessary ;  for  the  duty  of  laying  out  the  money  was 
in  the  ordinary  course  of  the  business  of  the  firm ;  and 
they  had  undertaken  it ;  and  in  that  case  I  agree  with  what 
is  laid  down  by  the  Master  of  the  Rolls  in  Sadler  v.  Lee 
[6  Beav.  330],  that  all  the  partners  became  liable  for  the 
several  acts  of  each.  In  Sadler  v.  Lee  the  act  consisted  of 
abusing  the  power  which  the  owner  of  the  fund  had  con- 
ferred upon  the  several  members  of  the  firm  by  his  power 
of  attorney.  In  this  case  the  act  consists  in  representing 
that  the  4500/.  had  been  invested  on  the  security;  but  in 
Bate  V.  Scales  [12  Ves.  402],  where  a  similar  representa- 


^  The  further  elaboration  of  J.  W.  Bromley's  defense  by  the  Reporter, 
and  his  note  of  the  argument  of  counsel  for  the  plaintiff  are  omitted. 


BLAIR  V.  BROMLEY  373 

tion  had  been  made  by  a  trustee,  who  ought  to  have  in- 
vested money  in  stock,  Sir  IVilliam  Grant  "considered  the 
case  of  a  representation  that  the  stock  did  exist,  as  pre- 
cisely a  parallel  case  to  the  actual  existence  of  the  fund 
in  stock  upon  that  day,  which  stock  was  sold  out.'-'  In 
the  present  case,  the  misrepresentation  continued  until  the 
fraud  was  discovered :  the  case  therefore,  according  to 
Sir  JV.  Grant,  is  the  same  as  if  on  that  day  the  fund,  hav- 
ing been  previously  invested,  had  been  called  in  and  re- 
ceived by  Messrs.  Bromley,  in  which  case  there  could  not 
have  been  any  question  as  to  the  Statute  of  Limitations. 

Those  who,  having  a  duty  to  perform,  represent  to 
those  who  are  interested  in  the  performance  of  it  that  it 
has  been  performed,  make  themselves  responsible  for  all 
the  consequences  of  the  non-performance;  Brown  v. 
Southouse  [3  Bro.  C.  C.  107],  which  was  the  case  of  an 
agent;  Evans  v.  BickncU  [6  Ves.  182],  where  Lord  Eldon 
lays  down  the  rule  generally.  Li  Banvell  v.  Parker,  Lord 
Hardwicke  applied  the  rule  to  the  case  of  a  scrivener  who 
had  undertaken  to  lay  out  money.  The  principle,  indeed, 
is  deeply  rooted  in  our  equitable  jurisdiction,  as  in  Middle- 
ton  V.  Middleton  [i  Jac.  &  JV.  96],  and  Lnttrell  v.  Olmius, 
referred  to  by  Lord  Eldon  in  Mestaer  v.  Gillespie  [11  Ves. 
638]. 

What,  then,  is  the  nature  of  the  liability  which  so 
arises  from  the  misrepresentation?  Merely  a  guarantee 
that  the  parties  whose  interest  might  be  affected  by  the 
misrepresentation  shall  be  placed  in  the  same  situation  as 
if  the  fact  represented  were  true.  The  misrepresentation 
was  probably  made  for  a  fraudulent  purpose;  but  the  con- 
sequence is  a  merely  civil  liability ;  and  as  one  partner 
may  certainly  bind  another  as  to  any  matter  within  the 
limits  of  their  joint  business,  so  he  may  by  an  act  which, 
though  not  constituting  a  contract  by  itself,  is  in  equity 
considered  as  having  all  the  consequences  of  one. 

I   am,  therefore,   of  opinion  that    William  Bromley's 


374         PARTNER'S   POWER   TO   BIND   COPARTNER 

partner,  though  he  had  no  knowledge,  or  means  of  knowl- 
edge, of  his  misrepresentation,  would  have  been  affected 
by  this  equity  arising  from  it,  and  that  time  did  not  begin 
to  run  against  the  Plaintiff's  right  until  the  discovery  of 
the   fraud. 

What  I  have  already  said,  and  the  cases  to  which  I 
have  referred,  make  it  unnecessary  to  say  much  upon  the 
objection  that  the  Plaintiff's  remedy,  if  any,  is  at  law. 
In  all  these  cases  the  effect  of  the  misrepresentation  raises 
an  equity  to  restore  the  parties  deceived  as  nearly  as  possi- 
ble to  the  situation,  in  which,  but  for  the  misrepresenta- 
tion, they  would  have  stood,  and  for  which  damages  in 
an  action  might  be  a  very  inadequate  remedy :  and  it  is  no 
objection  to  this  equity  that  the  facts  may  also  support  an 
action.  It  is  more  than  120  years  since  a  similar  objec- 
tion was  made  in  Colt  v.  WooUaston  [2  P.  Wins.  156]  and 
overruled. 

I  am,  therefore,  of  opinion  that  the  decree  of  the 
Vice  Chancellor  IVigrain  must  be  affirmed  with  costs. 


1 


GUILLOU  V.  PETERSON  375 


GUILLOU  V.  PETERSON. 

In  the  Supreme  Court  of  Pennsylvania,  1879. 

89  P ennsylvania  Reports,  163. 

Assumpsit  by  Rene  Guillou,  administrator  c.  t.  a.  of 
the  estate  of  Samuel  L.  Haven,  deceased,  against  Edward 
W.  Gould,  Theodore  R.  Strong,  Jesse  White,  Jr.,  and 
Pearson  S.  Peterson,  late  copartners  as  Gould,  Strong  & 
Co} 

Mr.  Justice  Paxson  delivered  the  opinion  of  the  court. 
May  7th  1879. 

The  court  below  having  entered  a  judgment  of  non- 
suit against  the  plaintiffs  upon  the  trial,  we  have  but  to 
consider  the  single  question  whether  there  was  suificient 
evidence  to  entitle  the  case  to  go  to  the  jury. 

The  case  of  the  plaintiffs  as  presented  was  this :  On 
the  seventh  day  of  November  1866,  the  defendants,  Ed- 
ward W.  Gould,  Theodore  R.  Strong  and  Jesse  White,  Jr., 
of  the  city  of  New  York,  and  Pearson  S.  Peterson,  of  the 
city  of  Philadelphia,  entered  into  articles  of  copartnership, 
under  the  name  of  Gould,  Strong  &  Co.,  for  the  purpose 
of  "buying  and  selling  stocks  on  commission,  making  loans, 
collecting  promissory  notes,  drafts  and  bills  of  exchange."' 
The  partnership  was  in  the  form  of  and  was  intended  to 
be  a  limited  partnership,  the  three  gentlemen  first  named 
being  the  general  partners,  residing  in  New  York,  where 
the  business  was  to  be  conducted,  and  the  said  Peterson 
being  the  special  partner  and  contributing  the  sum  of  $20,- 
000  as  cash  capital.  The  partnership  was  renewed  annu- 
ally to  1877  inclusive,  but  by  an  admitted  informality  in 
the  renewals  Peterson  became  a  general  partner  at  the  end 


^  The  Reporter's  statement  of  the  facts,  and  his  notes  of  the  argu- 
ments of  counsel  are  omitted. 


376         PARTNER'S   POWER  TO   BIND   COPARTNER 

of  the  first  year  so  far  as  the  pubHc  are  concerned,  and 
continued  so  until  its  termination.  As  between  the  part- 
ners, it  remained  a  special  partnership.  The  agreement 
further  specified  that  the  general  partners  should  not  en- 
gage in  speculations  of  any  kind;  that  Peterson,  the  special 
partner,  should  not  in  any  event  be  liable  for  the  debts 
or  obligations  of  the  firm  beyond  the  amount  of  capital 
($20,000)  contributed  by  him,  and  that  he  should  transact 
no  business  for  the  firm,  nor  be  employed  for  that  purpose 
as  agent,  attorney  or  otherwise.  Mr.  Peterson  seldom  vis- 
ited New  York,  and  appears  to  have  taken  little  if  any  part 
in  the  business. 

Theodore  R.  Strong,  one  of  the  partners,  was  one  of 
the  executors  of  Samuel  L.  Haven's  will.  Mr.  Haven  re- 
sided in  New  York  and  died  in  the  autumn  of  1865.  The 
other  executor,  Thomas  S.  Shepherd,  took  but  little  charge 
of  the  estate;  Mr.  Strong  was  practically  the  acting  ex- 
ecutor. In  the  month  of  February  1867,  Gould,  Strong 
&  Co.  borrowed  from  Mr.  Strong  $28,000  of  the  United 
States  treasury  notes,  known  as  seven-thirties,  which  he 
held  as  executor  and  which  belonged  to  Samuel  L.  Haven's 
estate.  These  notes  remained  in  the  possession  of  the  firm 
and  were  used  by  them  for  the  purpose  of  raising  money 
until  June  1868,  when,  having  been  called  in  by  the  gov- 
ernment, they  were  on  the  19th  of  that  month  converted 
into  other  bonds  known  as  five-twenties.  Whether  the 
conversion  was  by  Strong  or  the  firm  is  not  clear.  In 
Strong's  account  as  executor  with  the  firm  he  is  credited 
on  July  6th,  1868,  with  $28,000  seven-thirties  at  109,  less 
commission,  $31,453.80.  and  on  the  same  day  he  is  debited 
with  $28,000  five-twenties,  new  at  108^,  $30,485.  Within 
a  few  days  thereafter  $25,000  of  these  five-twenties  were 
entered  on  the  blotters  and  ledger  of  the  firm  as  loans  from 
Strong.  They  were  used  for  the  business  of  the  firm,  as 
stated  by  Mr.  Strong,  "to  pay  for  stocks  that  we  were 
carrying — stocks    for   our   customers;"    and    again,    "these 


GUILLOU  V.  PETERSON  2,77 

Stocks  and  bonds  were  used,  during  the  years  they  were 
lield  by  Gould,  Strong  &  Co.,  as  collaterals  to  raise  money. 
This  money  was  used  in  our  business."  The  five-twenties 
thus  loaned  to  the  firm  and  thus  used  by  them,  were  iiever 
returned  to  Strong,  but  were  sold  to  Jay  Cooke  &  Co.  by 
]\Ir.  Gould,  on  Dec.  14th,  1871,  for  $28,437.50,  and  the 
proceeds  used  to  pay  a  loan  for  which  they  had  been  pledged 
by  Gould,  Strong  &  Co.  For  the  like  purpose  of  raising 
money  the  firm  borrowed  from  Strong,  in  1869,  S^S  shares 
of  the  stock  of  the  Pittsburgh,  Fort  Wayne  and  Chicago 
Railway  Company,  belonging  to  the  said  estate,  which  said 
stock  was  continuously  used  as  collateral  to  raise  money 
until  January  8th,  1872,  when  the  firm  borrowed  the  sum 
of  $45,000  from  the  City  Bank  upon  these  513  shares  of 
stock.  The  bank  was  repaid  about  January  22d  of  the 
same  year  $45,314.09  by  the  sale  of  471  shares  of  said 
stock,  and  the  balance  thereof,  forty-two  shares  were  de- 
livered to  Mr.  Shepherd,  the  other  executor,  who  appears 
to  have  then  learned  for  the  first  time  of  ]\Ir.  Strong's  uiis- 
application  of  the  securities  belonging  to  j\Ir.  Haven's  es- 
tate. 

Gould  and  White  were  cognizant  of  all  these  trans- 
actions, and  were  active  participants  therein.  There  was 
evidence,  and  for  the  purposes  of  this  case  it  must  be 
taken  as  true,  that  ]\Ir.  Peterson  knew  of  the  transaction 
of  the  seven-thirties.  Strong  says:  "He  (Peterson)  knew 
of  the  loan  of  the  treasury  notes.  He  knew  they  belonged 
to  me  as  executor.  He  got  that  information  from  either 
Air.  Gould  or  myself;  we  were  both  present.  I  don't  know 
which  of  us  told  him.     That  was  in  April,  1868." 

No  question  has  been  made,  indeed  none  could  be 
made,  as  to  the  liability  of  Strong,  Gould  and  White  to 
Mr.  Haven's  estate  upon  this  state  of  facts.  Strong,  the 
executor,  was  guilty  of  a  fraud  upon  said  estate,  and  Gould 
and  White  were  participants  therein.  It  was  a  misapplica- 
tion of  the  assets  of  the  estate,  to  use  the  polite  and  con- 


378         PARTNER'S   POWER  TO   BIND   COPARTNER 

siderate  term  in  general  use  to  express  a  breach  of  trust. 
In  the  language  of  the  law  and  of  common  honesty,  it  was 
an  c]iibca::lcmc)it.  It  was  not  the  case  of  a  loan  of  unem- 
ployed funds  by  an  executor  to  his  firm,  for  the  purpose 
of  gaining  interest  for  his  cestnis  que  trustcnt,  but  of  the 
loan  of  interest-bearing  securities  to  enable  the  firm  to 
carry  on  its  operations.  Such  breaches  of  trust  have  be- 
come so  frequent  and  so  startling  within  the  last  few  years, 
that  we  would  fail  in  our  duty  were  we  to  omit  to  mark 
them,  when  they  come  before  us,  with  the  seal  of  our  stern 
condemnation. 

It  remains  to  consider  the  question  of  Mr.  Peterson's 
liability.  The  right  of  the  plaintiff  to  waive  the  tort  and 
sue  in  assumpsit  for  money  had  and  received  is  too  well 
settled  to  need  either  argument  or  the  citation  of  author- 
ity. It  is  alleged,  however,  that  Mr.  Peterson  is  not  liable, 
for  the  reason,  among  others,  that  "by  the  terms  of  the 
partnership  articles  he  was  to  be  liable  only  to  the  extent 
of  the  capital  he  had  contributed,  and  the  terms  of  those 
articles  were  known  to  the  executor  of  Haven's  will  when 
the  securities  were  delivered  for  use."  This  position  con- 
cedes Peterson's  liability  to  the  extent  of  $20,000.  It  as- 
sumes, however,  that  the  estate  of  Mr.  Haven  is  in  no 
better  position  than  Strong,  the  executor,  would  be.  Is 
this  position  sound?  I  concede  that  if  Strong  had  advanced 
his  own  money  or  his  own  securities  to  the  firm,  he  would 
be  bound  by  the  limitation  in  the  agreement  between  the 
partners.  But  this  suit  is  not  by  Strong  or  for  his  benefit. 
The  securities  he  loaned  the  firm  were  not  his  property. 
They  belonged  to  Mr.  Haven's  estate.  In  the  ordinary 
legitimate  dealings  of  an  executor  with  the  assets  of  an 
estate,  the  parties  in  interest  are  bound  by  his  acts  and  per- 
haps affected  with  notice.  In  such  case  he  may,  in  a  quali- 
fied sense,  be  regarded  as  their  agent.  But  surely  this 
principle  cannot  apply  where  an  executor  is  acting  in  fraud 
of  the  rights  of  the  estate.     It  is  opposed  to  every  well- 


I 


GUILLOU  V.  PETERSON  379 

settled  principle  applicable  to  trust  funds.  Trust  property- 
squandered  by  a  faithless  trustee  can  be  followed  wherever 
found,  and  if  earmarked  equity  will  lay  its  strong  hand 
upon  it"  and  restore  it  to  its  rightful  owner.  Such  owner 
is  not  bound  by  what  his  trustee  has  done  or  omitted  to 
do;  and  may  repudiate  or  rescind  his  contracts,  saving  of 
course  the  rights  of  innocent  third  parties.  Mr.  Strong 
was  not  acting  for  his  ccstuis  que  trust  cut  when  he  loaned 
these  securities  to  his  firm;  he  was  acting  in  direct  antago- 
nism to  them ;  he  was  embezzling  their  securities ;  he  was 
doing  that  which  was  a  sufficient  cause  for  his  removal 
by  the  court  having  jurisdiction  of  his  accounts.  We  think 
that  the  owners  of  the  securities  loaned  by  the  executor 
to  his  firm  occupy  a  very  different  position  from  the  ex- 
ecutor himself,  and  that  they  are  not  to  be  affected  with 
his  knowledge  of  the  private  understanding  or  agreement 
between  the  partners.  That  the  acts  of  a  trustee  in  excess 
of  his  powers  are  not  binding  upon  his  cestui  que  trust  was 
decided  in  Bohlen's  Estate,  25  P.  F.  Smith,  304.  Much 
more  so  where  the  act  is  not  a  mere  excess  of  power  but  a 
clear  and  fraudulent  abuse  of  it. 

It  is  said,  however,  that  Mr.  Peterson  is  not  liable  for 
the  further  reason  that  the  power  of  one  partner  to  bind 
the  others  is  at  most  an  implied  power;  that  each  partner 
is  the  agent  of  his  copartners  only  when  acting  in  the  scope 
of  his  power,  and  in  the  usual  course  of  the  business  of  the 
firm,  and  that  when  his  agency  is  denied  or  forbidden  by 
his  copartner,  with  notice  to  the  party  assuming  to  deal 
with  him,  as  the  agent  of  the  firm,  his  act  is  not  that  of 
the  firm,  but  his  individual  act  only.  As  an  abstract  prop- 
osition this  is  correct:  Story  on  Partnership,  sections  123 
and  138,  and  note  i,  p.  218;  Parsons  on  Partnership,  95; 
Gallway  v.  Matthew,  10  East,  264;  Spooner  v.  Thompson, 
48  Vt.  259 ;  Feigley  v.  Sponeberger,  5  W.  &  S.  564 ;  Yeager 
V.  Wallace,  7  P.  F.  Smith,  365.  It  does  not  apply  to  this 
case  as  it  stood  before  the  jury  when  the  judgment  of  non- 


380         PARTNER'S   POWER   TO   BIND   COPARTNER 

suit  was  entered.  The  cause  has  been  argued  upon  the 
theory  that  the  securities  were  borrowed  for  the  purpose 
of  using  the  money  in  wild  speculations  prohibited  by  the 
agreement  of  partnership.  The  evidence  is  not  so.  The 
money  was  used  in  the  business  of  the  firm,  carrying  stocks 
for  their  customers,  &c.  It  was  true  the  failure  of  the 
firm  was  caused  by  speculations  in  stocks  in  1872,  but  there 
is  no  evidence  that  they  were  engaged  in  such  speculations 
at  the  time  the  securities  were  borrowed,  or  that  the  securi- 
ties were  used  for  any  such  purpose.  The  borrowing  of 
securities  may  be  regarded  as  the  equivalent  of  borrowing 
money  so  far  as  the  responsibility  of  the  firm  is  concerned. 
This  has  always  been  considered  as  among  the  implied 
powers  of  a  partnership,  and  when  exercised  by  a  partner 
in  the  name  of  the  firm,  for  the  business  of  the  firm,  and 
the  proceeds  so  applied,  it  has  always  been  held  to  bind  the 
firm  unless  actual  notice  can  be  traced  to  the  person  loan- 
ing the  money  that  the  partner  had  no  authority  for  such 
purpose. 

Our  own  books  are  meagre  in  authority  upon  the  ques- 
tion of  the  responsibility  of  a  firm  under  such  circumstances. 
It  has  been  largely  discussed  in  England,  however,  in  a 
series  of  cases  growing  out  of  the  forgeries  of  one  Faunt- 
leroy,  who  was  convicted  and  executed  for  his  offence.- 

*     *     * 

The  wrong  done  here  on  the  part  of  the  firm  was  in 
converting  the  securities.  It  is  manifest  they  had  the  cus- 
tody of  them  for  Strong,  and  collected  the  interest  and  divi- 
dends for  him.  The  account  shows  this.  Afterwards  they 
borrowed  the  securities  from  Strong.  This  did  not  au- 
thorize their  conversion.  It  imposed  an  obligation  to  re- 
turn them  in  specie.  If  sold  it  was  the  duty  of  the  firm  to 
have  carried  the  proceeds  to  Strong's  credit  as  executor. 
Instead  of  doing  so  Gould  sold  the  five-twenties  and  with 


'  His  statement  of  the  facts  and  decision  in  Marsh  v.  Keating,  supra, 
is  omitted. 


GUILLOU  z'.  PETERSON  381 

the  proceeds  paid  a  debt  of  the  firm,  while  the  raihvay  stock- 
went  to  pay  the  $45,000  due  to  the  bank.  For  both  these 
debts  ^Ir.  Peterson  as  a  general  partner  was  individually 
liable.  It  is  entirely  in  the  course  of  the  regular  business 
of  the  firm  to  pay  its  own  debts.  I  regard  the  case  in  hand 
as  stronger  than  those  cited,  for  the  reason  that  the  firm 
got  the  benefit  of  every  dollar  realized  from  the  securities, 
while  in  ]\Iarsh  z'.  Keating  and  Stone  ■:•.  ]\Iarsh,  Fauntleroy 
cheated  his  firm  as  w^ell  as  the  owner  of  the  stock,  by  ap- 
propriating to  his  own  use  the  money  received  from  the 
sale  of  said  stock. 

It  is  not  meant  to  advance  the  broad  proposition,  that 
where  one  abuses  his  trust,  and  thereby  obtains  the  means 
to  advance  money  to  a  partnership,  he  thereby  raises  a 
contract  between  the  partnership  and  the  person  whose 
money  has  been  so  used.  The  rule  is  thus  laid  down  in 
Lindley  on  Partnership,  at  page  327:  "If  a  partner,  being 
a  trustee,  improperly  employs  the  money  of  his  cestui  que 
trust  in  the  partnership  business,  or  in  payment  of  the  part- 
nership debts,  this  alone  is  not  sufficient  to  entitle  the  cestui 
que  trust  to  obtain  repayment  of  his  money  from  the  firm." 
To  the  same  point  are  Ex  parte  Heaton,  Buck,  386 ;  Ex  parte 
Apsey,  3  Bro.  Ch.  C.  265  ;  Jacques  v.  ]Marquand,  6  Cowen, 
497.  If  Mr.  Strong  had  sold  the  securities  belonging  to 
Haven's  estate,  and  placed  the  proceeds  in  the  firm  as  his 
share  of  the  capital,  or  had  loaned  it  to  the  firm  as  his  own 
money,  and  without  knowledge  on  their  part  that  it  was 
trust  money,  they  would  not  have  been  liable  to  an  action  by 
the  representatives  of  Haven's  estate.  Here  the  securities 
belonging  to  the  estate  were  sold  by  the  firm,  with  knowledge 
of  the  true  ownership,  and  the  proceeds  used  to  pay  its  debts. 
This,  under  the  authorities,  treating  Mr.  Peterson  as  a  gen- 
eral partner,  which  we  think  he  is,  would  make  him  liable 
without  notice  or  knowledge  on  his  part  of  the  borrowing 
of  the  securities  or  their  conversion  by  his  partners. 

But  even  if  we  treat  Mr.  Peterson  as  a  special  partner, 


382         PARTNER'S   POWER   TO   BIND   COPARTNER 

so  far  as  Haven's  estate  is  concerned,  this  judgment  must  be 
reversed.  As  before  observed,  the  right  to  recover  against 
the  general  partners  is  undoubted.  It  is  equally  clear  as  to 
Mr.  Peterson,  if  he  had  notice  of  these  transactions,  or 
might  or  aught  to  have  known  them.  There  was  evidence 
that  he  did  not  know ;  not  as  to  all,  perhaps,  or  to  the  full 
extent  of  their  operations.  But  he  knew  in  April,  1868, 
that  his  firm  had  borrowed  $28,000  of  the  securities  of  the 
Haven  estate  from  the  executor.  Then  was  the  time  for  Mr. 
Peterson  to  speak.  Had  he  spoken  then,  as  he  should  have 
done,  Mr.  Haven's  estate  might  have  been  saved  from  ruin, 
his  firm  from  its  subsequent  insolvency,  and  his  own  estate 
from  the  peril  of  this  litigation.  A  man  who  is  brought  face 
to  face  with  such  an  irregularity  as  this  on  the  part  of  his 
firm,  cannot  shut  his  eyes  and  refuse  to  see  it.  Whether  we 
regard  the  transaction  as  a  wrong  to  the  estate,  or  a  violation 
of  the  partnership  agreement  in  regard  to  speculation,  it  was 
ample  to  put  Mr.  Peterson  upon  inquiry  as  to  the  nature  of 
the  transactions  of  his  firm,  and  if  he  chose  to  sleep  upon 
such  a  disclosure,  he  has  no  one  to  blame  but  himself.  It  is 
no  answer  to  this  to  say  that  the  seven-thirties  were  re- 
turned, and  that  he  had  no  subsequent  notice.  It  was  for  the 
jury  to  say  whether  the  alleged  return  was  anything  more 
than  a  matter  of  book-keeping,  and  for  any  other  purpose 
than  that  of  exchanging  the  form  of  the  securities.  In  any 
event  he  had  a  right  to  examine  the  books,  and  after  the 
irregularity  referred  to  it  was  his  duty  to  have  done  so. 
Such  examination  would  have  disclosed  the  conversion  of 
the  securities  belonging  to  the  Haven  estate,  and  the  applica- 
tion of  the  proceeds  to  the  payment  of  the  debts  of  his  firm. 
He  must  now  be  charged  with  the  knowledge  he  might  and 
ought  to  have  acquired. 

We  are  of  opinion  that  the  case  should  have  gone  to 
the  jury,  and  that  it  was  error  to  enter  a  judgment  of  non- 
suit. 

The  judgment  is  reversed  and  a  procedendo  awarded. 


I 


CHAPTER    VI. 


LIABILITY  FOR  INDUCING  MISTAKEN 
BELIEF  IN  THE  EXISTENCE  OF  A 
PARTNERSHIP. 


SECTION    I.— WHEN    A    PERSON    IS   ESTOPPED 
FROM   DENYING  THAT  HE  IS  A  PARTNER. 


De  berkom  v.  smith. 

In  The  Court  of  King's  Bench,  at  Nisi  Prius,  1794. 

I    Espiiiasse's  Reports,   29. 

Assumpsit  to  recover  the  value  of  a  quantity  of  foreign 
lace  against  the  defendants  charging  them  as  partners. 

It  was  admitted  that  Smith  one  of  the  defendants  was 
liable,  but  the  other  defendant  Lezvis  denies  that  he  was 
a  partner.     This  was  the  only  question  in  the  case. 

The  evidence  on  the  part  of  the  Plaintiff  was,  That  he 
was  a  foreigner  living  at  Lisle  in  Flanders;  that  having  been 
applied  to  by  the  defendants  for  a  quantity  of  lace  on  credit, 
that  before  he  would  furnish  it,  he  wrote  over  to  his  cor- 
respondent in  London  to  enquire  concerning  their  circum- 
stances and  situation;  that  his  correspondent  had  enquired 
from  a  Mr.  Bothani  a  merchant  in  London,  who  informed 
him  that  they  were  in  partnership  in  trade,  whicli  informa- 
tion the  correspondent  communicated  to  the  Plaintiff,  who 
in  consequence  thereof  gave  them  the  goods  on  the  terms 
they  asked. 

Mr.  Botham's  clerk  was  called,  and  proved,  That  the 
only  connection  in  trade  between  ]\Ir.  Bothani  and  the  de- 
fendants was  in  discounting  bills,  which  Mr.  Bothani  had 

(383) 


384  PARTNERSHIP  BY  ESTOPPEL 

been  in  the  habit  of  doing  for  Smith  one  of  the  Defendants, 
but  that  on  discounting  a  bill  at  one  time  for  Smith,  that 
he  had  introduced  Lewis  to  him  as  his  partner. 

Lord  Kenyon  upon  this  evidence  ruled  that  it  was  not 
sufficient  to  charge  Lczvis  as  a  partner.  His  Lordship  said, 
that  persons  might  be  partners  in  a  particular  concern  or 
business,  but  that  notwithstanding  if  they  did  not  appear 
to  the  world  as  partners,  that  it  should  not  be  sufficient  to 
constitute  a  general  partnership  and  make  them  liable  in 
other  cases  not  connected  with  such  particular  business. 
That  the  circumstance  in  evidence  of  the  introduction  of 
Lczi'is  to  Mr.  Botham  should  be  taken  secundum  subjectani 
viateriam,  that  is,  as  applying  to  the  transaction  in  which 
Smith  was  concerned  with  Mr.  Botham,  the  discounting  of 
bills,  to  which  transaction  only  it  should  be  confined,  and 
that  he  was  therefore  of  opinion,  that  without  further  evi- 
dence a  general  partnership  could  not  be  established,  in 
order  to  charge  Lewis  the  other  Defendant  in  this  action. 

It  afterwards,  however,  appearing  in  evidence,  that  in 
fact  Lewis  had  represented  himself  to  the  Plaintiff,  as  part- 
ner in  trade  with  Smith;  his  Lordship  in  his  charge  to  the 
Jury  added,  that  though  in  point  of  fact  parties  are  not 
partners  in  trade,  yet  if  one  so  represents  himself,  and  by 
that  means  gets  credit  for  goods  for  the  other,  that  both 
shall  be  liable. 

The  Plaintiff  recovered.^ 


^  Compare  the  report  of  the  earlier  case  of  Young  v.  Axtell,  in 
note  I,  to  Grace  v.  Stnith,  Chapter  V.  supra,  in  which  Lord  Mansfield 
said,  that  as  the  defendant  had  suffered  herself  to  be  held  out  as  a 
partner  "she  was  certainly  liable,  though  the  plaintiff  did  not,  at  the 
time  of  dealing,  know  that  she  was  a  partner,  or  that  her  name  was 
used."    See  contra  Thompson  v.  First  Nat.  Bk.  infra,  and  notes. 


GORHAN  i:  THOMPSON  385 


GORHAN  V.  THOMPSON. 

In  the  Court  of  King's  Bench,  at  Xisi  Prius,  1791. 

I  Peake's  Reports,  42. 

Assumpsit.  One  of  the  defendants  had  suffered  judg- 
ment by  default. 

The  defendants  had  been  partners  about  seven  years 
since,  and  had  dissoh-ed  the  partnership,  but  no  notice  of 
the  dissolution  had  been  inserted  in  the  Gazette,  nor  did  the 
plaintiffs  know  of  it,  but  thought  they  were  dealing  with 
both  defendants.  But  it  appeared  that  the  dissolution  was 
generally  known  in  the  neighborhood. 

Lord  Kenyon  said,  to  discharge  the  partner  retiring 
from  the  partnership  there  must  be  a  public  advertisement 
in  the  Ga::cttc,  or  at  least  the  dissolution  must  be  notorious 
to  the  public,  and  actual  knowledge  of  it  brought  home  to 
the  creditor.  It  would  be  the  hardest  measure  imaginable 
upon  the  creditor  were  the  law  otherwise,  for  while  he 
supposed  he  was  giving  credit  to  a  man  having  sufficient 
to  satisfy  the  whole  of  his  demand,  he  might  be  trusting  a 
beggar. 

Verdict  for  the  plaintiff.^ 


^Compare:  Parkin  v.  Carnithcrs.  3  Esp.  248.  180T.  (A,  B  ct 
al.,  were  members  of  a  firm,  trading  as  "A,  B  &  Co."  B  retired,  but 
no  notice  of  this  fact  was  published  and.  no  change  was  made  in  the 
firm  name.  C.  who  had  had  no  prior  dealings  with  the  firm,  advanced 
mone}'  to  the  firm  on  a  promissory  note.  C  brought  suit  on  this  note, 
making  A  one  of  the  defendants.  Le  Blanc,  J.,  charged  the  jury  that 
if  C  did  not  know  of  B's  retirement,  B  was  liable). 

Goodc  V.  Harrison.  5  C.  &  Aid.,  147,  1821.  (  B,  an  infant,  was  in 
partnership  with  C.  Before  becoming  21  he  ceased  to  take  any  part 
in  the  business.  He  did  not,  on  reaching  his  majority,  give  any  notice 
of  the  dissolution  of  the  firm.  Held,  that  on  becoming  of  age  B  should 
have  given  notice  of  the  dissolution  of  the  firm,  and  that  .A,,  who  be- 
lieved B  to  be  a  partner,  could  recover  against  him  as  a  partner  on  an 
obligation  arising  after  B  became  21.") 

Benjamin  v.  Cmrrt.  47  Wis.  375,  T879.  (A  and  B  were  partners, 
trading  under  the  name  of  A.     Thev  dissolved.     No  notice  of  the  dis- 


386  PARTNERSHIP  BY  ESTOPPEL 

solution  was  ever  published.  C,  who  had  had  no  previous  knowledge 
of  the  firm  or  its  business,  sold  goods  to  A  who  had  continued  tne 
business.  C  sued  B  as  a  partner  and  offered  to  prove  that  at  the 
time  he  sold  the  goods  A  and  B  had  the  general  reputation  of  being 
partners;  that  he,  C,  had  on  inquiry  heard  of  this  reputation,  and 
relied  on  it.  Held  on  appeal,  that  the  trial  court  should  have  admitted 
this  evidence,  not  to  prove  a  partnership  in  fact,  but  to  prove  a  partner- 
ship by  holding  out.) 

The  Death  of  a  Partner  dissolves  the  partnership;  but  no  notice 
of  the  death  is  necessary  in  order  to  protect  the  estate  of  the  deceased 
partner : 

Webster  v.  Webster.  3  Swan.  491,  note,  1791.  (A,  the  executor  of 
B,  brought  a  bill  in  chancery  against  C  and  D,  his  co-executors,  to 
restrain  them  from  using  the  name  of  B  in  their  business,  alleging 
that  the  defendants  were  trving  to  subject  B's  estate  to  the  conse- 
quences of  the  trade.  Bill  dismissed  on  the  ground  that  there  was 
no  danger  that  B's  estate  would  be  subject  to  liability  in  this  way,  and 
the  fraud  on  the  public  "is  no  ground  for  the  plaintiff's  coming  into  this 
court"). 

Marlett  v.  Jackman.  3  Allen  TMass.^.  287,  1861.  (A,  B.  C  and  D 
were  in  partnersHip.  C  died,  and  the  remaining  members  ceased  to  do 
business.  D  signed  a  note  in  the  name  of  the  old  firm;  E  was  an  en- 
dorsee. Held,  that  though  E  might  be  ignorant  of  the  death  of  C,  and 
the  fact  that  A,  B  and  D  had  not  continued  the  business,  he  could  not 
recover  from  A  and  B ;  that  as  death  operates  as  a  dissolution  of  itself, 
"being  a  public  fact  all  men  are  bound  to  know  it.") 


GRAHAAI  V.  HOPE  387 


GRAHAM  V.  HOPE 
In  the  Court  of  King's  Bench,  at  Nisi  Prius,   1792. 

•  I  Peake's  Reports,  154. 

The  defendants  had  been  in  partnership  together, 
and  the  plaintiff  had  sold  them  goods  as  partners.  After- 
wards the  partnership  was  dissolved,  and  notice  of  the 
disolution  given  in  the  London  Gazette;  and  after  this  notice, 
the  plaintiff  had  sold  and  delivered  the  goods  for  which  the 
present  action  was  brought. 

The  defendants  called  witnesses,  who  swore  that  a 
notice  had  been  given  to  the  agent  of  the  plaintiff,  that 
the  partnership  was  dissolved.  The  agent  on  the  contrary 
positively  swore  that  he  had  received  no  such  notice. 

Lord  Kenyon  told  the  jury,  that  the  cause  depended 
entirely  on  the  credit  they  gave  to  the  witnesses  on  the  one 
side  and  the  other.  The  Gazette,  he  thought  was  not  of 
itself  sufficient  notice  to  the  plaintiff  of  the  dissolution  of 
the  partnership.  His  lordship  said  he  did  not  say  this  for 
the  purpose  of  this  cause  merely,  but  meant  to  lay  it  down 
as  a  general  rule  to  govern  the  conduct  of  all  men.  Many 
people  there  were  in  this  kingdom  who  never  saw  a  Gazette 
to  the  day  of  their  deaths,  and  very  mischievous  would  be 
the  consequences  if  they  were  bound  by  a  notice  inserted 
in  it.  It  was  incumbent  on  persons  dissolving  a  partner- 
ship, to  send  notice  of  such  dissolution  to  all  the  persons 
with  whom  they  had  had  dealings  in  partnership. 

The  jury,  believing  the  defendants  witness,  gave  a  ver- 
dict for  the  defendants. 


388  PARTNERSHIP  BY  ESTOPPEL 


GODFREY  V.  TURNBULL. 
In  the  Court  of  King's  Bench,  at  Nisi  Prius,  1794. 

I  Espinassc's  Reports,  371. 

This  was  an  action  by  the  plaintiff  as  indorsee  of  a 
promissory  note,  against  the  Defendant,  as  the  makers  of  it. 

The  Defendants  had  been  partners  in  trade,  but  the 
partnership  had  been  dissolved  prior  to  the  date  of  the  note. 
Macaidcy,  one  of  the  Defendants,  suffered  judgment  to  go 
by  default.  The  other  Defendant  relied,  that  the  note 
was  made  by  the  Defendant  Macauley  only,  after  the  dis- 
solution of  the  partnership,  who  had  put  their  joint  names 
on  it  without  any  authority  from  him.  The  note  was  dated 
the  6th  of  April  1793.  On  the  19th  of  the  March  preceding, 
notice  of  the  dissolution  of  the  partnership,  dated  the  15th, 
had  appeared  in  the  Gazette.  The  question  was,  whether  the 
notice  given  in  the  Gazette  was  sufficient,  so  as  to  exonerate 
the  Defendant  TttrnbulL 

Per  Lord  Kenyon.  In  general,  if  a  partner  gives 
a  note  in  the  partnership  name,  all  the  partners  are  bound 
by  it;  and  that  is  the  case,  even  if  given  after  the  actual 
dissolution  of  the  partnership,  if  that  was  not  sufficiently 
notified,  and  the  party  who  took  the  note,  took  it  on  the 
faith  of  the  partnership  name. 

A  secret  dissolution  of  a  partnership  cannot  discharge 
the  partners;  but  if  the  dissolution  is  notified  in  the  ordinary 
and  usual  way,  as  it  is  the  only  mode  by  which  the  fact  of 
the  dissolution  can  be  promulgated  to  the  world,  at  least 
to  those  who  have  had  no  previous  dealing  with  the  partners, 
it  seems  sufficient,  at  least  to  be  left  to  the  Jury,  from  thence 
to  infer  notice. 

In  many  cases,  notice  in  the  Gazette  is  suf^cient  to 
subject  a  party  to  penalties,  as  in  the  cases  of  smuggling 


4 


GODFREY  V.  TURXBULL  389 

and  outlawries.  So  in  the  cases  of  bankrupts,  notice  in  the 
Gazette  is  sufficient  for  every  purpose.  In  the  present  in- 
stance, there  is  no  proof  of  any  actual  notice  to  ]\Ir.  Godfrey 
the  Plaintiff,  but  the  publication  in  the  Gazette  is  proved, 
antecedent  to  his  taking  the  note. 

The  Jury  are  to  judge  from  the  practice  in  the  usual 
course  and  ordinary  mode  of  business.  Notices  are  to  be 
found  in  every  Gazette  of  the  dissolution  of  partnerships, 
which  seems  to  point  out  that  as  the  mode  adopted  by  the 
world  for  notifications  of  this  sort,  and  therefore  every 
prudent  man  in  business  ought  to  consult  them. 

The  Jury  found  a  verdict  for  the  Defendant,  Tiirnbidl} 


^Compare:  Lansing  v.  Gaine.  2  Johns.  300.  1807.  (A  and  B  were 
partners.  They  dissolved  partnership,  and  notice  was  published  in  the 
newspapers.  A  signed  a  note  in  the  name  of  B  and  himself.  C  ob- 
tained a  note  for  value.  Held,  C  could  not  recover  from  B.  Kent, 
C.  J. :  "Notice  in  the  newspapers  of  the  dissolution  of  a  partnership  is 
sufficient  notice  to  all  persons  who  have  had  no  previous  dealings  with 
the  firm."  p.  304.    Accord:  Mozvatt  v.  Hyland,  3  Day.  353,  1809). 


390  PARTNERSHIP  BY  ESTOPPEL 


NEWSOME  V.  COLES. 
In  the  Court  of  King's  Bench,  at  Nisi  Prius,  i8ii. 

2  Campbell's  Reports,  617. 

This  was  an  action  against  the  three  defendants  as 
acceptors  of  a  bill  of  exchange. 

Thomas  Coles  and  his  three  sons,  the  present  defend- 
ants formerly  carried  on  business  in  partnership  together, 
under  the  firm  of  "Thomas  Coles  and  Sons."  The  father 
died  in  1805,  and  the  three  sons  continued  to  carry  on  bus- 
iness under  the  same  firm,  till  the  year  1808.  George  and 
Charles  then  withdrew,  and  established  a  new  business  under 
a  new  firm.  Notice  of  the  dissolution  of  partnership 
was  published  in  the  London  Gazette,  and  was  sent  round 
to  the  correspondents  of  the  house.  William  Coles  contin- 
ued the  old  business,  by  himself,  under  the  old  firm;  and  ac- 
cepted the  bill  in  question,  drawn  upon  Messrs.  Thomas  Cole 
and  Sons.  The  plaintiff  had  not  had  any  dealings  with  the 
partnership  of  "Thomas  Coles  and  Sons"  when  composed 
of  the  three  brothers;  and  when  he  took  the  bill  in  question, 
he  did  not  know  that  that  partnership  had  been  dissolved.* 

Lord  Ellenborough. — It  is  not  pretended  that  the 
defendants,  George  and  Charles  Cole,  ever  interfered  with 
the  business  carried  on  by  William  after  the  dissolution  of 
the  partnership,  or  by  any  act  whatsoever  authorized  him 
to  use  the  firm  under  which  they  had  traded  together.  I 
am  therefore  of  opinion  that  they  are  not  liable  for  that 
firm  being  used  by  him  without  their  authority.  Ample 
notice  had  been  given  of  the  dissolution  of  the  partnership; 
and  after  that,  it  was  the  duty  of  persons  taking  securities 


4 


^  The  statement  of  facts  as  given  in  the  report  is  abbreviated,  and 
the  Reporter's  note  of  the  argument  of  counsel  for  the  plaintif?  is 
omitted. 


NEWSO.ME  i:  COLES  391 

in  the  name  of  Thomas  Coles  and  Sons,  to  enquire  who 
were  designated  by  that  firm.  The  plaintiff  might  not  know 
of  the  dissokition;  but  he  had  the  means  of  knowing,  and 
the  partners  who  retired  could  not  remain  liable  for  his  ig- 
norance. I  think  they  were  not  bound  to  apply  to  the 
Lord  Chancellor  for  an  injunction,  or  to  take  any  notice 
of  the  firm  which  their  brother  might  happen  to  use.  They 
were  discharged  from  all  liability  for  his  acts  by  the  dis- 
solution of  the  partnership,  and  the  notice  which  was 
communicated  of  that  event.     The  plaintiff  must  be  called." 


-Compare:  In  re  Frazcr  (1892)  Q.  B.  6.^3.  (W.  and  J.  Eraser 
were  in  partnership  under  the  name  of  "W.  &  J.  Eraser."  They 
(hssolved  and  published  proper  notices  of  dissolution.  J.  F.  per- 
mitted W.  F.  to  carry  on  the  business  under  the  name  of  the  dissolved 
firm.  A  bank,  which  had  had  no  dealings  with  the  old  firm,  discounted 
a  bill  drawn  by  W.  F.  in  the  name  of  the  old  firm.  Held,  that  J.  F.  was 
not  liable  on  this  bill). 


392  PARTNERSHIP  BY  ESTOPPEL 


WILLI  AIMS  V.  KEATS. 
In   the  King's  Bench,   at   Nisi   Prius,    1817. 

2  Starkie's  Reports.  290. 

This  was  an  action  by  the  indorsees,  against  the  ac- 
ceptors of  a  bill  of  exchange  dated  December  23d,  18 16, 
drawn  by  Ambrose  on  the  defendants,  for  the  sum  of 
220/.  10s.  poyabk  to  the  order  of  the  drawer  six  months 
after  the  date. 

The  defendant  Keats  had  suffered  judgment  to  go  by 
default,  and  the  defence  on  the  part  of  Archer  was,  that  he 
had  ceased  to  be  a  partner  when  the  bill  was  drawn. 

It  appeared,  that  the  bill  although  bearing  the  date  of 
December  23d,  1816,  had  in  fact  been  drawn  in  the  latter 
end  of  February,  1817,  and  had  been  accepted  by  Keats, 
for  the  accommodation  of  Ambrose,  who  knew  that  the 
partnership  between  the  defendants  had  been  previously  dis- 
solved. Ambrose  kept  it  in  his  possession  till  March, 
and  then  negotiated  it  with  the  plaintiffs  for  value.  Neither 
of  the  defendants  had  received  any  value  for  it.  On  the 
13th  of  January,  1817,  it  was  agreed,  that  the  copartner- 
ship between  the  defendants  should  be  dissolved ;  and  no- 
tice was  given  in  the  Ga::ette  of  the  17th  of  January,  1817, 
announcing  that  the  dissolution  had  taken  place  on  the 
31st  December  preceding.  No  particular  notice  of  the  dis- 
solution of  partnership  was  brought  home  to  the  plaintiffs, 
and  it  appeared,  that  the  names  of  Keats,  Archer  and  Co. 
remained  over  the  door  of  the  defendants'  shop  in  the  PoiiU 
fry,  where  they  had  previously  carried  on  business  as 
hatters  till  April  when  Cobnans  name  was  substituted  for 
Archer  s. 

Topping  for  the  defendant  Archer  contended,  that  he 
could  not  be  bound  by  an  acceptance  of  his  partner  sub- 


WILLIAMS  r.  KEATS  393 

sequent  to  the  dissolution  of  the  partnership ;  and  he  at- 
tempted to  distinguish  this  case  from  those,  where  former 
deahngs  have  taken  place  between  the  parties;  for  there 
he  admitted,  that  it  was  necessary  to  shew,  that  it  was 
necessary  to  prove  notice  to  the  party. 

Marryatt  contended,  that  it  was  incumbent  on  the 
defendant  Archer  to  prove  notice  of  the  dissolution,  since 
whatever  might  be  their  private  arrangements  between  them- 
selves, to  the  world  they  remained  partners,  till  the  name  of 
Colinan  was  substituted  for  that  of  Archer. 

Lord  Ellenborough  was  of  opinion,  that  it  was  nec- 
essary that  the  defendant  should  bring  home  some  notice 
to  the  plaintiffs.  He  had  imprudently  suffered  notice  to  be 
given  of  the  continuance  of  the  partnership,  by  permitting 
his  name  to  remain  over  the  door  till  April.  Notice  in  tlie 
Gazette  was  not  to  be  considered  as  notice  of  the  dissolu- 
tion of  partnership  to  all  the  world,  it  was  a  medium  of 
knowledge,  but  not  equivalent  to  actual  notice. 

Verdict  for  the  plaintiffs.^ 


^Compare:  Dolman  v.  Orchard.  2  Car.  &  P.,  104,  1825.  (A,  B  and 
C  were  partners  in  the  business  of  attorneys.  D,  an  endorsee  of  a  bill 
of  exchange,  sued  them  as  acceptors,  the  bill  having  been  drawn  on 
"A,  B  &  Co."  and  accepted  by  A.  At  the  trial  C  gave  evidence  to  sl-.ow 
that  he  was  not  a  partner  at  the  date  of  the  acceptance.  The  court 
left  it  to  the  jury  to  determine  whether,  if  C  was  not  at  the  date  of 
the  acceptance  a  partner  in  fact,  he  had  held  himself  out  as  suc'.i  by 
allowing  his  name  to  remain  on  the  office  door.     Verdict  for  C.) 

Boyd  V.  McCann,  10  Md.  118,  1856.  (A  and  B  were  partners, 
trading  as  "A  &  B."  They  dissolved  partnership,  but  B,  who  continued 
the  business,  kept  the  old  firm  name  over  the  door.  C  sued  .\  and  B 
as  partners,  and  asked  the  court  to  charge  that  the  existence  of  the 
name  over  the  door,  "after  the  publication  of  the  notice  of  dissolution," 
would  of  itself  entitle  the  plaintiff  to  recover.  Held,  that  the  court 
property  refused  to  charge  as  requested.) 

Walte  V.  Brczvster.  31  Vt.  516,  1859.  W.  Brewster  and  C.  Brew^t^^r 
virere  partners  trading  under  the  name  of  W.  &  C.  Brewster.  They 
dissolved  partnership,  and  notice  of  the  dissolution  was  published,  and 
the  fact  became  generally  known  in  the  place  where  they  did  business, 
but  C.  B.  continued  to  work  in  the  business  as  an  employee  of  W.  B. 
and  permitted  W.  B.  to  carry  on  the  business  under  the  old  name.  A. 
a  resident  of  another  city  who  bad  had  no  dealings  with  the  firm  entered 
into  a  contract  with  \V.  B.  in  the  old  firm  name.  A  had  no  notice  of 
the  dissolution,  and  during  the  nef^otiat^ion";  saw  C.  B.  working  in  the 
store.  There  was  some  evidence  that-  C.  B.  took  nart  in  the  neeotia- 
tions  with  A,  acting  as  if  he  was  a  principal.     A  sued  W.  B.  and  C.  B. 


394 


PARTNERSHIP  BY  ESTOPPEL 


as  partners.  The  Court  charged  the  jury  that  if  W.  B.  and  C.  B.  were 
not  partners  in  fact,  that  if  C.  B.  was  present  when  the  contract  was 
executed  without  giving  A  knowledge  that  he  was  not  a  partner,  A 
would  have  a  right  to  treat  him  as  a  partner.  The  Appellate  Court, 
affirming  the  judgment  in  favor  of  A,  said:  "The  defendant,  by  con- 
tinuing to  be  engaged  in  the  business  of  the  firm  after  its  dissolution, 
and  by  allowing  his  name  to  be  kept  upon  the  sign  and  used  in  the 
transactions  of  the  apparent  firm,  held  himself  out  to  the  world  as  a 
partner.  *  *  *  Hg  thereby  took  upon  himself  the  consequences  of 
holding  out  such  appearances ;  and  one  consequence  was,  that  if  a 
person,  ignorant  of  the  fact  that  he  was  not  a  partner,  should  be  misled 
by  the  appearances  to  believe  that  he  was,  and  to  deal  with  him  as  such, 
he  would  as  to  such  person  be  a  partner.") 


DEFORD  &  CO.  V.  REYNOLDS  395 


DEFORD  &  CO.  V.  REYNOLDS. 
In  the   Supreme  Court  of   Pennsylvania,    i860. 

^6  Pennsylvania  Reports,  325. 

Error  to  the  Common  Pleas  of  Franklin  County.^ 
Strong,  J. — Some  time  in  the  year  185 1,  Reynolds, 
the  defendant  below,  entered  into  partnership  with  Robert 
McCulloh,  since  deceased,  under  the  firm  name  of  R. 
McCulloh  &  Co.  In  the  same  year,  the  new  firm  opened 
an  account  with  the  plaintiffs  below,  who  were  leather 
merchants,  doing  business  in  the  city  of  Baltimore,  and 
became  indebted  to  them  in  a  considerable  sum.  On  the 
7th  of  April,  1853,  the  firm  of  R.  AlcCulloh  &  Co.  was 
dissolved  by  the  mutual  consent  of  the  partners,  and  notice 
of  the  dissolution  was  published  in  the  newspapers  of  Cham- 
bersburg,  where  the  firm  had  principally  transacted  its  bus- 
iness. There  is,  however,  no  direct  evidence  that  actual  no- 
tice of  the  dissolution  was  given  to  the  Messrs.  Deford, 
with  whom  the  firm  had  been  dealing.  Robert  ]\IcCulloh 
continued  the  business  after  the  retirement  of  ]\Ir.  Reynolds, 
made  payments  to  the  plaintiffs,  and  purchased  from  them 
hides,  oil,  &c.,  until  December  31st.  1853.  He  died  in 
April,  1854,  and  this  is  a  suit  against  Air.  Reynolds  as  sur- 
viving partner  to  recover  the  balance  due  to  the  plaintiffs 
on  the  31st  of  December,  1853. 

The  first  contested  question  is.  whether  Reynolds 
is  liable  for  any  portion  of  the  debt  contracted  after  April 
/th,  1853,  when  the  firm  of  R.  McCulloh  &  Co.  was  dis- 
solved? The  solution  of  this  depends  upon  the  answers 
to  be  given  to  two  other  inquiries  ;  first,  whether,  in  this  case, 
the  law  required  notice  to  be  given  to  the  Messrs.  Deford, 


*  The  Reporter's  statement  of  the  facts  and  his  notes  of  the  argu- 
ment of   counsel   are  omitted. 


396  PARTNERSHIP  BY  ESTOPPEL 

in  order  to  secure  the  retiring  partner  against  liability  for 
debts  contracted  after  his  retirement;  and  secondly,  wheth- 
er, if  such  notice  was  necessary,  it  was  in  fact  given,  or, 
what  is  equivalent,  whether  the  creditors  had  knowledge  of 
the  dissolution  before  the  debt  was  contracted  ?- 

It  is  to  the  first  of  these  minor  questions  that  the  earlier 
part  of  the  argument  of  the  plaintiff  in  error  is  addressed, 
and  to  this  was  directed  the  first  point  propounded  by  him  to 
the  court  below.  That  point  was  that,  if  the  jury  believed 
from  the  evidence  that  the  defendant  was  not  known  to  the 
plaintiffs  as  a  member  of  the  firm  of  R.  ]\IcCulloh  &  Co.,  he 
might  withdraw  at  any  time,  without  being  required  to  give 
notice  of  the  dissolution  of  the  partnership,  and  is  only 
chargeable  for  debts  contracted  during  the  time  he  was  a 
partner.  To  this  the  court  replied,  that  if  the  jury  believed 
the  defendant  was  an  open  partner  in  the  firm  of  R.  McCul- 
loh  &  Co.,  and  that  the  plaintiffs  sold  the  goods  and  fur- 
nished the  stock  on  the  credit  of  the  company,  then  the  liabil- 
ity of  the  defendant  did  not  cease  with  the  dissoluion,  al- 
though the  plaintiffs  may  not  have  known  who  were  the 
members  of  the  firm. 

The  rule  doubtless  is,  that  an  unknown  dormant 
partner  may  retire  from  the  firm  without  giving  notice  of 
his  retirement,  and  thenceforth  be  no  longer  liable  for  debts 
which  the  firm  may  incur.  Having  ceased  to  be  a  partner 
in  fact,  he  is  not  a  party  to  the  contract  which  creates  the 
debt ;  and,  being  unknown,  he  has  not  encouraged  the  cred- 
itor to  rely  upon  his  responsibility.  But  was  Reynolds  3 
dormant  partner?  And  could  the  court,  as  matter  of 
law,  instruct  the  jury  that  he  was,  if  they  believed  he  was 
not  known  by  the  plaintiffs  to  be  a  partner?  Does  the 
mere  fact  that  one  selling  goods  to  a  firm  is  unacquainted 
with  the  names  of  all  the  persons  who  compose  it,  establish 
tliat  those  are  dormant  partners  as  to  him  whose  names 


-  Only  as  much  of  the  opinion  of  the  Court  as  relates  to  the  first 
inquiry  is  reprinted. 


DEFORD  &  CO.  V.  REYNOLDS  397 

are  unknown?  It  is  perhaps  not  easy  to  define  what  con- 
stitutes a  dormant  partner  in  all  cases.  The  word  is  some- 
times used  in  opposition  to  active,  and,  at  other  times,  as 
contradistinguished  from  ostensible  or  knozvn.  This  i:ase 
does  not  require  us  to  attempt  a  precise  definition.  McCul- 
loh  and  Reynolds  were  in  partnership,  it  is  admitted, 
until  April  7th,  1853.  They  were  the  only  partners.  They 
transacted  business  under  a  firm  name  that  represented  to 
those  dealing  with  them  that  some  other  than  R.  ^NIcCul- 
loh  was  responsible.  The  vendor  of  goods,  of  course, 
gave  credit,  not  to  ]McCulloh  alone,  but  to  him  and  whatever 
other  persons  were  embraced  within  the  company.  He  may 
not  have  known  the  name  of  the  person  included  under  the 
description  "&  Co."  and  yet  have  known  that  the  partner 
not  named  was  the  most  responsible.  Indeed,  he  might 
have  been  the  active  partner,  and  yet  unknown  by  name 
to.  the  creditor.  Now  suppose  that  the  Messrs.  Deford 
had  known  that  there  was  a  partner  of  Robert  JMcCulloh, 
an  open  partner,  known  as  such  to  the  community  at  Cham- 
bersburg.  Suppose  they  had  known  that  he  was  the  active 
agent  in  transacting  most  of  the  business  of  the  firm,  and 
that  he  alone  was  a  man  of  property,  but  had  not  been 
made  acquainted  w^ith  the  fact  that  his  partner  was  Hugh 
,W.  Reynolds,  can  it  be  said  that  in  selling  to  the  firm, 
they  trusted  IMcCulloh  alone,  and  gave  no  credit  to  Rey- 
nolds? If  not,  then  the  reason  given  why  a  dormant  part- 
ner is  not  liable  after  his  retirement  without  notice,  is 
not  applicable  to  this  case.  Then  credit  w^as  given  to 
Reynolds  under  the  name  "&  Co.,"  and  the  same  reason 
exists  for  his  continued  liability  as  there  is  for  the  liability 
of  any  partner  who  has  retired  W'ithout  notice. 

In  Mitchell  v.  Dale  2  Harr  &  Gill  i'/2,  it  was  said  by 
Martin,  J.,  that  every  partner  is  dormant,  unless  his  name 
appear  in  the  firm  "or  is  embraced  under  general  terms, 
as  the  name  of  one  of  the  firm  and  company."  Without 
assenting  to  this  as  universally  true,  it  may  be  said,  that 


398  PARTNERSHIP  BY  ESTOPPEL 

its  obvious  implication  is,  that  if  one  is  embraced  in  the 
general  description,  the  name  of  one  partner  and  company, 
his  is  not  a  case  of  dormant  or  secret  partnership.  Collyer, 
in  his  treatise,  sect.  4,  defines  a  dormant  partner  to  be  one 
"whose  name  and  transactions  as  a  partner  are  professedly 
concealed  from  the  world."  The  only  object  which  such  an 
one  can  have  in  remaining  dormant  or  secret,  is,  that  credit 
may  be  given  to  the  ostensible  partners  alone,  and  not  to 
him.  \\'ith  such  a  purpose  or  object,  doing  business  under 
the  name  of  one  partner  aiid  company,  is  inconsistent.  It 
can  be  nothing  less  than  an  invitation  to  the  public  to  give 
credit  to  more  than  the  single  partner  named.  Entertaining 
such  views,  we  are  of  opinion  that  there  was  no  error  in  the 
answer  of  the  court  below  to  the  defendant's  first  point. 
Whether  he  was  a  dormant  partner  or  not  was  a  question 
for  the  jury,  and,  trading  as  he  did  under  the  firm  name 
of  R.  McCulloh  &  Co.,  the  solitary  fact  that  he  was  not 
known  by  the  plaintiffs  to  be  the  company,  was  not  sufficient 
to  enable  the  court  to  say  that  his  liability  ceased  at  the 
dissolution  of  the  firm,  without  notice  to  those  who  had  dealt 
with  it.  If  he  was  an  open  partner,  and  the  credit  was 
given  to  the  company,  he  was  still  bound. 
Judgment  for  the  plaintiff  affirmed.^ 


^Compare:  Poillon  v.  Secor.  61  N.  Y.  456.  1875.  (A,  B  and  C  were 
in  partnership,  trading  as  "A,  B  &  Co."  A  retired  from  the  firm,  but 
allowed  B  and  C  to  continue  the  business  under  the  old  name  and  use 
his  name  as  a  member  of  the  firm.  The  new  firm  purchased  goods 
from  D,  and  D  sued  A,  B  and  C  as  partners.  Held,  that  in  order  to 
hold  A  as  a  partner  it  was  not  necessary  for  him  to  show  that  he 
knew  who  A  was,  or  that  he  gave  credit  because  of  his  apparent  con- 
nection with  the  firm.  Query,  whether  if  D  had  known  that  A  for  a 
consideration  had  allowed  himself  to  be  held  out  as  partner,  D  would 
have  recovered?) 

Shaiuhurg  v.  Ruggles.  S^,  Pa.  148,  1876.  (A.  B.  C  ef  al.  were  in 
partnership,  trading  as  "The  Citizens'  Bank."  B's  name  appeared  as 
one  of  the  directors  of  the  bank.  S  was  a  depositor.  B  retired  from 
the  firm,  but  he  gave  no  notice  of  this  retirement  to  S.,  and  his  name 
was  continued  as  one  of  the  directors,  though  he  requested  that  it  be 
withdrawn.  Held,  that  B  was  liable  to  S  for  money  deposited  after 
his  withdrawal,  though  S  admitted  that  he  did  not  inquire  and  did 
not  know  who  the  partners  were.  Accord :  Hozvell  v.  Adams,  68  N.  Y. 
314.  1877.)  ^  .    „ 

McGoTvan  v.  American  Tan  Bark  Co..  121  U.  S.  575-  1887.     (A,  B, 


DEFORD  &  CO.  z:  REYNOLDS  399 

ef  at.  were  partners.  D  had  business  with  them.  They  made  a  contract 
with  D.  D  sued  on  the  contract.  The  defendants  claimed  that  before 
the  contract  they  had  formed  a  corporation  and  assigned  all  the  prop- 
erty of  the  firm  to  the  corporation,  and  that  the  contract  was  made  by 
the  corporation.  The  Court  charged  that  D  could  recover  against  the 
defendants  as  partners  unless  he  had  notice  of  the  creation  of^the 
corporation  at  the  time  he  entered  into  the  contract.) 

The  Elmira  Iron  and  Steel  Rolling  Mill  Co.  v.  Harris,  124  N.  Y. 
280,  1891.  (A,  C  and  B  entered  into  an  apreement  by  which  they  were 
to  form  a  partnership  under  the  name  of  "A  &  Co."  A  and  C  were  the 
active  members.  B  to  act  as  a  consulting  member.  There  was  no 
agreement  that  B's  connection  with  the  firm  was  to  be  kept  secret,  and 
A  mentioned  it  to  others,  but  not  to  D  who  dealt  with  the  firm.  B  re- 
tired, and  notice  of  his  retirement  was  published.  D,  still  ignorant 
of  the  existence  of  B,  made  a  contract  with  the  firm.  Held,  that  D 
could  hold  B  on  this  contract  as  a  partner.  Haight,  C.  J.,  dissented 
on  the  ground  that  B  was  a  dormant  partner,  and  as  such  notice  of  his 
retirement   was   not   necessary.) 

See  further  the  discussion  in  Strecker  v.  Conn,  90  Ind.  469,  1883, 
pp.  470,  471. 


400  PARTNERSHIP  BY  ESTOPPEL 


S^IITH  V.  HILL. 

In  the  Supreme  Court  of  Vermont,  1872. 

45  Vermont  Reports,  go. 

Assumpsit  upon  a  promissory  note,  signed  "L.  D.  Hill 
&  Co.  by  F.  C.  Harrington,"  and  also  by  Francis  Ricli- 
ardson.  Plea,  the  general  issue,  and  trial  by  the  court, 
June  term,  1S72,  Ross  J.,  presiding. 

There  never  existed  any  such  firm  as  L.  D.  Hill  &  Co. 
None  of  the  defendants  were  ever  in  company  with  each 
other  in  any  kind  of  business.  Two  or  three  years  before 
said  note  was  given,  a  man  in  Island  Pond  notified  the  de- 
fendant Hill,  that  Harrington  was  using  the  name  of  L.  D. 
Hill  &  Co.  in  his  staging  business.  Hill  afterwards  saw 
Harrington,  and  told  him  he  must  not  use  that  name  to 
injure  him,  and  Harrington  said  he  would  not.  Hill  knew 
nothing  of  the  giving  of  said  note  till  about  the  time  this 
suit  was  commenced.  It  did  not  appear  that  the  plaintiff 
knew  of  the  previous  use  of  Hill's  name  by  Harrington  in 
his  staging  business ;  nor  did  it  appear  whether  Harring- 
ton made  any  representations  to  the  plaintiff  at  the  time 
he  signed  the  note.  At  that  time  he  gave  the  plaintiff's 
notes  to  the  amount  of  $1600  for  the  purchase  of  some 
staging  property,  and  paid  them  himself,  except  the  balance 
due  on  the  note  in  question.  Hill  was  never  called  upon 
to  pa}^  anything  on  paper  thus  signed,  until  this  suit  was 
brought.  There  was  no  service  on  Richardson,  and  Har- 
rington made  no  defense.  Judgment  for  the  defendant 
Hill,  and  against  the  defendant  Harrington.  To  the  rendi- 
tion of  judgment  for  Hill,  the  plaintiff  excepted.^ 

Peck,  J.  If  one  suffers  another  to  hold  him  out  as 
a  partner,  or  to  use  his  name  in  business  as  such,  he  is  liable 
as  a  partner  on   a  contract   thus  made,   although  in   fact 


^  The  Reporter's  notes  of  the  cases  cited  by  counsel  are  omitted. 


i 


S^IITH  V.  HILL  4G1 

he  has  no  interest  in  the  business  of  such  partnership. 
When  the  defendant  Hill  was  informed  that  Harrington, 
in  his  staging  business,  was  using  his  name,  under  the  name 
of  L.  D.  Hill  &  Co.,  it  does  not  appear  that  he  forbid  it, 
but  that  he  afterwards  saw  Harrington  and  told  him  he 
must  not  use  that  name  to  hurt  him.  and  that  Harrington 
replied  that  he  would  not.  '  The  fair  import  of  this  is, 
that  Hill  acquiesced  in  such  use  of  his  name,  on  Harring- 
ton's assurance  that  he  would  not  thereby  injure  him  or,  in 
other  words  that  he  would  not  thus  use  his  name  beyond 
his  ability  to  indemnify  him,  and  that  he  would  save  him 
harmless.  The  risk  of  Harrington's  neglect  to  redeem  this 
pledge  was  upon  Hill,  and  not  upon  those  to  whom  Harring- 
ton should,  in  his  staging  business,  thus  pledge  the  credit 
of  Hill.  It  makes  no  difference  that  Hill  knew  nothing  of 
the  giving  of  the  note  in  question  till  about  the  time  of  the 
commencement  of  the  suit.  It  is  urged  by  the  defendant's 
counsel,  apparently  with  great  confidence,  that  as  it  did 
not  appear  that  the  plaintiff  ever  knew  of  the  previous  use 
of  the  defendant  Hill's  name  by  Harrington  in  his  staging 
business,  nor  what  representations,  if  any,  Harrington  made 
to  Smith,  the  plaintiff,  at  the  time  he  executed  the  note  by 
the  name  of  L.  D.  Hill  &  Co.,  the  defendant  Hill  cannot 
be  held  liable.  This  would  be  material,  if  the  signature 
did  not  disclose  the  name  of  Hill ;  as  it  might  then  be  urged 
that  the  plaintiff  did  not  take  the  note  relying  on  the  credit 
of  Hill.  But  as  the  name  of  the  defendant  Hill  appears 
specifically  upon  the  face  of  the  note  as  one  of  the  makers, 
the  case  is  quite  different,  since  the  legal  intendment  is,  that 
the  payee  takes  a  note  upon  the  faith  of  the  persons  whose 
names  appear  upon  it  as  makers.  The  common  practice 
of  this  court  is,  in  cases  tried  by  the  court  when  the  facts 
are  found  by  the  county  court,  if  the  judgment  of  the  county 
court  is  reversed,  to  proceed  and  render  final  judgment,  such 
as  the  facts  warrant ;  but  in  this  case  we  conclude  to  reverse 
the  judgment,  and  grant  a  new  trial. 

Judgment  reversed  and  new  trial  granted. 


402 


PARTNERSHIP  BY  ESTOPPEL 


THOMPSON  z'.  FIRST  NATIONAL  BANK  OF  TO- 
LEDO. 

In  the  Supreme  Court  of  the  United  States,  1884. 

Ill  United  States  Reports,  529. 

Action  by  the  First  National  Bank  of  Toledo,  against 
certain  persons,  including  one  Edward  R.  Thompson,  as 
partners  upon  a  draft  for  $5000,  drawn  and  accepted  by  the 
partnership.  Thompson  jfiled  a  separate  answer  denying 
that  he  was  a  member  of  the  partnership  or  liable  to  the 
plaintiff  on  the  draft  sued  on.  There  was  a  general  verdict 
for  the  plaintiff.  The  defendants,  after  duly  excepting  to 
the  refusal  of  the  Court  to  give,  as  requested,  the  instruc- 
tions set  forth  in  the  following  opinion,  sued  out  this  writ 
of  error.^ 

Mr.  Justice  Gray  delivered  the  opinion  of  the  Court. 

The  plaintiff  at  the  trial  sought  to  charge  Thompson 
with  liability  as  a  partner  upon  two  grounds :  First,  that  he 
was  actually  a  partner.  Second,  that  if  not  actually  a  partner 
he  had  held  himself  out  to  the  world  as  such.  And  the  case 
was  submitted  to  the  jury  upon  both  grounds. 

The  first  and  second  assignments  of  error  relate  to  the 
exclusion  of  evidence  offered  by  the  defendants  bearing  upon 
the  first  ground  of  action.  The  third  and  fourth  assign- 
ments of  error  relate  to  the  instructions  given  and  refused 
as  to  the  second  ground  of  action. - 

The  remaining  and  the  principal  question  in  the  case  is, 
whether  the  liability  of  Thompson,  by  reason  of  having  held 


'  Tlie  facts  are  partially  restated.     The  essential  facts  are  given  in 
the  opinion. 

'  Only  so  much  of  the  opinion  as  relates  to  the  third  and   fourth 
assignments  of  error  is  reprinted. 


THOMPSON  z'.  FIRST  NATIONAL  BANK  OF  TOLEDO  403 

himself  out  as  a  partner,  was  submitted  to  the  jury  under 
proper  instructions. 

Tlie  court  was  requested  to  instruct  the  jury  that  if 
Thompson  was  not  in  fact  a  member  of  the  partnership,  the 
plaintiff  could  not  recover  against  him,  unless  it  appeared 
from  the  testimony  that  he  had  knowingly  permitted  himself 
to  be  held  out  as  a  partner,  and  that  the  plaintiff*  had  knowl- 
edge thereof  during  its  transactions  with  the  partnership. 
The  court  declined  to  give  this  instruction;  and  instead 
thereof  instructed  the  jury,  in  substance,  that  if  Thompson 
permitted  himself  to  be  held  out  to  the  world  as  a  partner, 
by  advertisements  and  otherwise,  as  shown  by  the  evidence,, 
and  to  be  introduced  to  other  persons  as  a  partner,  the 
plaintiff  was  entitled  to  the  benefit  of  the  fact  that  he 
was  so  held  out,  and  he  was  estopped  to  deny  his  liability 
as  a  partner,  although  the  plaintiff  did  not  know  that  he  was 
so  held  out,  and  did  not  rely  on  him ,  for  the  payment 
of  the  plaintiff's  debt,  or  give  credit  to  him,  in  whole  or  in 
part. 

This  court  is  of  opinion  that  the  Circuit  Court  erred 
in  the  instructions  to  the  jury,  and  in  the  refusal  to  give  the 
instruction  requested. 

A  person  who  is  not  in  fact  a  partner,  who  has  no  in- 
terest in  the  business  of  the  partnership  and  does  not  share 
in  its  profits,  and  is  sought  to  be  charged  for  its  debts  because 
of  having  held  himself  out,  or  permitted  himself  to  be  held 
out,  as  a  partner,  cannot  be  made  liable  upon  contracts  of 
the  partnership  except  with  those  who  have  contracted  with 
the  partnership  upon  the  faith  of  such  holding  out.  In 
such  a  case,  the  only  ground  of  charging  him  as  a  partner 
is,  that  by  his  conduct  in  holding  himself  out  as  a  partner  he 
has  induced  persons  dealing  with  the  partnership  to  believe 
him  to  be  a  partner,  and,  by  reason  of  such  belief,  to  give 
credit  to  the  partnership.  As  his  liability  rests  solely  upon 
the  ground  that  he  cannot  be  permitted  to  deny  a  participa-, 
tion  which,  though  not  existing  in  fact,  he  has  asserted,  or 


404  PARTNERSHIP  BY  ESTOPPEL 

permitted  to  appear  to  exist,  there  is  no  reason  why  a  credit- 
or of  the  partnership,  who  has  neither  known  of  nor  acted 
upon  the  assertion  or  permission,  should  hold  as  a  partner 
one  who  never  was  in  fact,  and  whom  he  never  understood 
or  supposed  to  be,  a  partner,  at  the  time  of  dealing  with 
and  giving  credit  to  the  partnership. 

There  may  be  cases  in  which  the  holding  out  has  been  so 
public  and  so  long  continued  that  the  jury  may  infer  that  one 
dealing  with  the  partnership  knew  it  and  relied  upon  it,  with- 
out direct  testimony  to  that  effect.  But  the  question  whether 
the  plaintiff  was  induced  to  change  his  position  by  acts  done 
by  the  defendant  or  by  his  authority  is,  as  in  other  cases 
of  estoppel  in  pais,  a  question  of  fact  for  the  jury,  and 
not  of  law  for  the  court.  The  nature  and  amount  of  evi- 
dence requisite  to  satisfy  the  jury  may  vary  according  to  cir- 
cumstances. But  the  rule  of  law  is  always  the  same,  that 
one  who  had  no  knowledge  or  belief  that  the  defendant  was 
held  out  as  a  partner  and  did  nothing  on  the  faith  of  such  a 
knowledge  or  belief,  cannot  charge  him  with  liability  as  a 
partner  if  he  was  not  a  partner  in  fact. 

The  whole  foundation  of  the  theory  that  a  person  who, 
not  being  in  fact  a  partner,  has  held  himself  out  as  a  partner, 
may  be  held  liable  as  such  to  a  creditor  of  the  partnership 
who  had  no  knowledge  of  the  holding  out,  and  who  never 
gave  credit  to  him  or  to  the  partnership  by  reason  of  sup- 
posing him  to  be  a  member  of  it,  is  a  statement  attributed  to 
Lord  Alansfield  in  a  note  of  trial  before  him  at  nisi  prius 
in  1784  as  cited  by  counsel  in  a  case  in  which  it  was  sought 
to  charge  as  a  partner  one  who  had  shared  in  the  profits  of 
a  partnership.  By  so  much  of  that  note  as  was  thus  cited, 
which  is  the  only  report  of  the  case  that  has  come  down  to 
us,  it  would  appear  that  in  an  action  by  Young,  a  coal  mer- 
chant, against  Mrs.  Axtell  and  another  person,  to  recover 
for  coals  sold  and  delivered,  the  plaintiff  introduced  evidence 
that  Mrs.  Axtell  had  lately  carried  on  the  coal  trade,  and 
that  the  other  defendant  did  the  same  under  an  agreement 


! 


THOMPSON  V.  FIRST  NATIONAL  BANK  OF  TOLEDO  403 

between  them,  by  which  she  was  to  bring  what  customers  she 
could  into  the  business,  and  the  other  defendant  was  to  pay 
her  an  annuity,  and  also  two  shillings  for  every  chaldron  that 
should  be  sold  to  those  persons  who  had  been  her  custQjn- 
ers  or  were  of  her  recommending:  and  that  bills  were  made 
out  in  their  joint  names  for  goods  sold  to  her  customers ;  and 
that  the  jury  found  a  verdict  against  Mrs.  Axtell,  after  being 
instructed  by  Lord  Mansfield  that  "he  should  have  rather 
thought,  on  the  agreement  only,  that  Mrs.  Axtell  would  be 
liable,  not  on  account  of  the  annuity,  but  the  other  pay- 
ment, as  that  would  be  increased  in  proportion  as  she  in- 
creased the  business.  However,  as  she  suffered  her  name 
to  be  used  in  the  business,  and  held  herself  out  as  a  partner, 
she  was  certainly  liable,  though  the  plaintiff  did  not,  at  the 
time  of  dealing  know  that  she  was  a  partner,  or  that  her 
name  was  used."  Young  v.  Axtell,  at  Guildhall  Sittings  af- 
ter Hilary  Term,  24  Geo.  HI.,  cited  in  JJ'aiigJi  v.  Carver,  2 
H.  Bl.  235,  242.  But  as  the  case  was  not  there  cited  upon  the 
question  of  liability  by  being  held  out  as  a  partner,  it  is  by 
no  means  certain  that  we  have  a  full  and  accurate  report  of 
what  was  said  by  Lord  Mansfield  upon  that  question ;  still  less 
that  he  intended  to  lay  down  a  general  rule,  including  cases 
in  which  one,  who  in  fact  had  never  taken  any  part  in  or 
received  any  profits  from  the  business,  held  himself  out  as  a 
partner. 

In  delivering  the  judgment  of  the  Common  Bench  in 
Waugh  V.  Carz'er,  Chief  Justice  Eyre  said  :  "Xow  a  case  may 
be  stated,  in  which  it  is  the  clear  sense  of  the  parties  to  the 
contract  that  they  shall  not  be  partners ;  that  A  is  to  contrib- 
ute neither  labor  nor  money,  and,  to  go  still  farther,  not  to  re- 
ceive any  profits.  But  if  he  will  lend  his  name  as  a  partner, 
he  becomes,  as  against  all  the  rest  of  the  world,  a  partner, 
not  upon  the  ground  of  the  real  transaction  between  them, 
but  upon  principles  of  general  policy,  to  prevent  the  frauds  to 
which  creditors  would  be  liable,  if  they  were  to  suppose  that 
they  lent  their  money  upon  the  apparent  credit  of  three  or 


406  PARTNERSHIP  BY  ESTOPPEL 

four  persons,  when  in  fact  they  lent  it  only  to  two  of  them, 
to  whom,  without  the  others,  they  would  have  lent  nothing." 
2  H.  Bl.  246. 

This  statement  clearly  shows  that  the  reason  and  object 
of  the  rule  by  \vhich  one  who,  having  no  interest  in  the  part- 
nership, holds  himself  out  as  a  partner,  is  held  liable  as  such, 
are  to  prevent  frauds  upon  those  who  lend  their  money  upon 
the  apparent  credit  of  all  who  are  held  out  as  partners ;  and 
the  later  English  authorities  uniformly  restrict  accordingly 
the  effect  of  such  holding  out. 

In  Mclvcr  v.  Humble,  in  the  King's  Bench  in  1812, 
Lord  Ellenborough  said  :  "A  person  may  make  himself  liable 
as  a  partner  with  others  in  two  ways :  either  by  a  participa- 
tion in  the  loss  or  profits ;  or  in  respect  of  his  holding  him- 
self out  to  the  world  as  such,  so  as  to  induce  others  to  give 
a  credit  on  that  assurance."  And  Mr.  Justice  Bayley  said: 
"To  make  Humble  liable,  he  must  either  have  been  a  part- 
ner in  fact  in  the  loss  and  profit  of  the  ship,  or  he  must  have 
held  himself  out  to  be  such.  Now  here  he  was  not  in  fact  a 
partner,  and  the  goods  were  not  furnished  upon  his  credit, 
but  upon  the  credit  of  Holland  and  Williams."  16  East,  169, 
174,  176. 

In  Dickinson  v.  Valpy,  in  the  same  court  in  1829,  Mr. 
Justice  Parke  (afterwards  Baron  Parke  and  Lord  Wensley- 
dale)  said :  "If  it  could  have  been  proved  that  the  defendant 
had  held  himself  out  to  be  a  partner,  not  'to  the  world,'  for 
that  is  a  loose  expression,  but  to  the  plaintiff  himself,  or 
under  such  circumstances  of  publicity  as  to  satisfy  a  jury 
that  the  plaintiff  knew  of  it  and  believed  him  to  be  a  partner, 
he  would  be  liable  to  the  plaintiff  in  all  transactions  in  which 
he  engaged  and  gave  credit  to  the  defendant  upon  the  faith 
of  his  being  such  partner.  The  defendant  would  be  bound 
by  an  indirect  representation  to  the  plaintiff,  arising  from  his 
conduct,  as  much  as  if  he  had  stated  to  him  directly  and  in 
express  terms  that  he  was  a  partner,  and  the  plaintiff  had 
acted  upon  that  statement."  10  B.  &  C.  128,  140.  And  see 
Carter  v.  Whalley,  i  B.  &  A.  11. 


THO.MPSOX  V.  FIRST  NATIONAL  BANK  OF  TOLEDO  407 

In  Ford  v.  JJliifniarsh,  in  the  Court  of  Exchequer  in 
1840.  a  direction  given  by  Baron  Parke  to  the  jury  in  sub- 
stantially the  same  terms  was  held  by  Lord  Abinger,  Baron 
Parke,  Baron  Gurney  and  Baron  Rolfe  (afterward  Lord 
Cranworth)  to  be  a  sound  and  proper  direction;  and  Baron 
Parke,  in  explaining  his  ruling  at  the  trial,  said  :  "I  told  the 
jury  that  the  defendant  would  be  liable  if  the  debt  was  con- 
tracted whilst  he  was  actually  a  partner,  or  upon  a  represen- 
tation of  himself  as  a  partner  to  the  plaintiff,  or  upon  such  a 
public  representation  of  himself  in  that  character  as  to  lead 
the  jury  to  conclude  that  the  plaintiff,  knowing  of  that  repre- 
sentation, and  believing  the  defendant  to  be  a  partner,  gave 
him  credit  under  that  belief."  Hurlstone  &  Walmsley,  53,  55. 

In  Pott  V.  Eyton,  in  the  Common  Bench  in  1846,  which 
was  an  action  by  bankers  to  recover  a  balance  of  account 
against  Eyton  and  Jones,  on  the  ground  that  either  they  were 
actual  partners  in  the  business  carried  on  by  Jones,  or  Eyton 
had  by  his  own  permission  been  held  out  as  a  partner.  Chief 
Justice  Tindal,  delivering  the  judgment  of  the  court,  said : 
"There  was  no  evidence  to  show  that  credit  was  in  fact  given 
to  Eyton,  or  that  the  bankers  knew  that  his  name  was 
over  the  door  of  the  shop  at  Mostyn  Quay,  or  that  they  sup- 
posed him  to  be  a  partner.  One  person  who  had  been  mana- 
ger, and  another  who  had  been  a  clerk  in  the  bank,  were  in 
court;  and  if  they  could  have  given  such  evidence,  they 
would  no  doubt  have  been  called  as  witnesses.  We  must 
assume,  therefore,  that  credit  was  given  to  Jones  alone ;  and, 
if  Eyton  is  to  be  made  liable,  that  must  be  on  the  ground  of 
an  actual  partnership  between  himself  and  Jones."  3  C.  B. 
32,  39.  In  Martyn  v.  Gray,  in  the  same  court  in  1863,  Chief 
Justice  Earle  and  IVIr.  Justice  Willes  expressed  similar  opin- 
ions. 14  C.  B.  (N.  S.)  824,  839,  843.  The  decision  of  the 
Court  of  Exchequer  in  Edmundson  v.  Thompson,  in  1861, 
is  to  the  like  effect.  31  Law  Journal  (N.  S.)  Ex.  207;  5".  C. 
8  Jurist.  (N.  S.)  235. 

Mr.   Justice  Lindley,   in  his  Treatise  on  the  Law  of 


408 


PARTNERSHIP  BY  ESTOPPEL 


Partnership,  sums  up  the  law  on  this  point  as  follows :  "The 
doctrine  that  a  person  holding  himself  out  as  a  partner  and 
thereby  inducing  others  to  act  on  the  faith  of  his  represen- 
tations, is  liable  to  them  as  if  he  were  in  fact  a  partner,  is 
nothing  more  than  an  illustration  of  the  general  principle  of 
estoppel  by  conduct."  "The  expression  in  Waugh  v.  Car- 
ver, 'if  he  will  lend  his  name  as  a  partner  he  becomes  as 
against  all  the  rest  of  the  world  a  partner,'  requires  qualifica- 
tion; for  the  real  ground  on  which  liability  is  incurred  by 
holding  oneself  out  as  a  partner  is,  that  credit  has  been  there- 
by obtained.  This  was  put  with  great  clearness  by  Mr.  Jus- 
tice Parke  in  Dickinson  v.  l^alpy."  "No  person  can  be  fixed 
with  liability  on  the  ground  that  he  has  been  held  out  as  a 
partner,  unless  two  things  concur,  viz. :  first,  the  alleged  act 
of  holding  out  must  have  been  done  either  by  him  or  by  his 
consent,  and,  secondly,  it  must  have  been  known  to  the  per- 
son seeking  to  avail  himself  of  it.  In  the  absence  of  the  first 
of  these  requisites,  whatever  may  have  been  done  cannot  be 
imputed  to  the  person  sought  to  be  made  liable ;  and  in  the 
absence  of  the  second,  the  person  seeking  to  make  him  liable 
has  not  in  any  way  been  misled."  Lindley  on  Partnership 
(ist  ed.)  45-47;  (4th  ed.)  48-50. 

The  current  of  authority  in  this  country  is  in  the  same 
dii'ection.  Benedict  v.  Davis,  2  McLean,  347;  Hicks  v. 
Cram,  17  Vermont,  449;  Fitch  v.  Harrington,  13  Gray,  469; 
Wood  V.  Pennell,  51  Maine,  52;  Sherrod  v.  Langdon,  21 
Iowa,  518;  Kirk  v.  Hartman,  6^^  Penn.  St.  97;  Hefner  v. 
Palmer,  6y.  Illinois,  161;  Cook  v.  Penrhyn  Slate  Co.,  36 
Ohio  St.  135;  Uhl  V.  Harvey,  78  Indiana,  26.  The  only 
American  case,  cited  at  the  bar,  which  tends  to  support  the 
ruling  below,  is  the  decision  of  the  Commission  of  Appeals 
in  Poillon  v.  Sccor,  61  N.  Y.  456.  And  the  judgment  of 
the  Court  of  Appeals  in  the  later  case  of  Central  City  Sav- 
ings Bank  v.  Walker,  66  N.  Y.  424.  clearly  implies  that  in 
the  opinion  of  that  court  a  person  not  in  fact  a  partner  can- 
not be  made  liable  to  third  persons  on  the  ground  of  having 


THOMPSON'  z:  FIRST  NATIONAL  BANK  OF  TOLEDO  409 

been  held  out  as  a  partner,  except  upon  the  principle  of  equit- 
able estoppel,  that  he  authorized  himself  to  be  so  held  out, 
and  that  the  plaintiffs  gave  credit  to  him. 

The  result  is  that,  both  upon  principle  and  upon  authority, 
the  third  and  fourth  assignments  of  error,  as  well  as  the 
first,  must  be  sustained,  the  judgment  of  the  Circuit  Court 
reversed,  and  the  case  remanded  to  that  court  with  directions 
to  order  a  N'ew  trial} 


^  Compare:  Vice  v.  Anson,  7  B.  &  C,  409,  1827.  (A,  having  paid  cer- 
tain moneys,  received  notice  that  she  was  a  partner  in  a  mine.  She 
believed  herself  a  partner,  and  spoke  of  herself  to  others  as  such.  B 
gave  credit  to  the  partnership,  but  without  any  knowledge  of  the 
existence  of  A.     Held,  that  A  was  not  liable  to  B.) 

Denithorne  v.  Hook,  112  Pa.  240,  1886.  (A  and  B  were  in  partner- 
ship. They  desired  to  enter  into  a  contract  to  construct  a  reservoir  for 
C.  D  agreed  to  go  on  the  contractor's  bond.  E,  who  drew  the  con- 
tract, thought  that  the  firm  consisted  of  A  and  D ;  and  the  agreement 
was  worded  as  a  contract  between  A  and  D,  and  C.  D  signed  the 
contract,  it  having  been  explained  to  him  that  his  doing  so  would  in 
effect  make  him  a  surety,  as  he  had  agreed.  F  furnished  supplies  to 
A  and  B  in  the  course  of  their  prosecution  of  the  work.  Not  being 
paid,  he  brought  suit  against  A  and  D  as  partners,  and  offered  the 
above  recited  contract  as  evidence  of  the  partnership.  Held,  that  the 
evidence  was  improperly  admitted,  because  it  was  not  sufficient  evidence 
of  a  partnership  in  fact,  and  not  being  accompanied  by  an  offer  to  show 
that  the  plaintiff  knew  of  it  at  the  time  the  debt  was  created,  it  could 
not  be  used  to  fasten  any  liability  on  the  defendants.") 

Hahlo  V.  Mayer,  102  IMo.  93,  1890.  CA  carried  on  business  under 
his  own  name.  He  changed  the  name  under  which  he  carried  on  busi- 
ness to  "A  &  Son."  The  son  was  not  in  the  business.  The  son  signed 
"A  &  Son"  to  accommodation  paper  which  came  into  the  hands  of  B, 
a  bona  fide  holder  for  value.  A  had  never  represented  to  B  that  his, 
B's,  son  was  a  partner.  The  Court  below  instructed  the  jury  that, 
though  B  was  ignorant  of  the  fact  that  A  held  out  his  son  as  a  partner, 
nevertheless  B  could  recover  from  A.  Held,  that  the  instruction  was 
erroneous,  and  a  new  trial  was  granted.     Barclay,  J.,  dissented.) 


410 


PARTNERSHIP  BY  ESTOPPEL 


SMITH  V.  BAILEY. 
In  the  Court  of  Appeals,  England,  1891. 

Laii'  Reports   [1891],  2  Queen's  Bench,  403. 

Action  in  respect  of  personal  injuries  occasioned  to  the 
female  plaintiff  by  the  negligent  management  of  a  traction 
engine  upon  a  highway. 

The  defendant,  who  was  the  owner  of  a  traction  engine, 
to  which  his  name  and  address  were  affixed,  as  required  by 
the  Locomotives  Act,  1865,  s.  7,  let  the  same  for  three 
months.  Through  the  negligent  management  of  the  engine 
whilst  it  was  being  used  upon  a  highway  by  the  hirer,  per- 
•sonal  injuries  were  occasioned  to  the  plaintifif,  who  was 
being  driven  in  a  carriage  upon  the  highway. 

Verdict  for  the  defendant.  The  plaintiffs  applied  for  a 
new  trial. -^ 

Lord  Esher,  M.  R.  (after  dealing  with  the  question 
whether  the  verdict  of  the  jury  on  the  question  of  fact  was 
against  evidence,  and  holding  that  it  was  not,  his  Lordship 
proceeded  as  follows: — )  The  case  of  Stables  v.  Eley  (i  C. 
&  P.  614)  was  then  cited  on  behalf  of  the  plaintiffs  as  au- 
thority for  the  proposition  that,  if  a  man  allows  a  carriage  to 
go  out  with  his  name  upon  it,  he  holds  himself  out  as  liable 
for  injury  occasioned  by  the  negligence  of  any  person  driving 
it ;  and,  according  to  the  language  used  in  the  report,  the  de- 
cision does  seem  to  go  to  the  length  of  holding  that  in  such 
a  case  there  would  be  conclusive  evidence  of  liability.  But, 
if  so,  I  think  the  decision  was  wrong,  and  I  cannot  agree  with 
it.  The  case  is  mentioned  in  ^•arious  text-books ;  but  the 
comment  upon  it  always  appears  to  be  that,  if  it  is  to  be  taken 
to  go  that  length,  it  must  be  wrong,  and  it  has  been  sug- 
gested that  the  utmost  effect  that  could  be  given  to  the  deci- 

'  The   facts  are  restated. 


SMITH  V.  BAILEY  411 

sion  is  that  under  such  circumstances  there  would  be  prima 
facie  evidence  of  Habihty,  which  might  be  met,  however,  by 
shewing  the  truth  of  the  matter.  If  the  decision  is  to  be 
taken  as  going  any  further  than  that,  as  I  have  said,  I  think 
it  is  wrong.  If  it  really  only  went  that  length,  it  is  not  nec- 
essary upon  the  present  occasion  to  say  whether  it  is  wrong 
or  not.- 

BowEx,  L.  J.  I  am  of  the  same  opinion.  I  only  wish 
to  say  that  in  my  judgment  the  decision  in  Stables  v.  Eley 
(i.  C.  &  P.  614)  can  only  be  justified  on  the  supposition  that 
the  case  had  been  misreported.  The  only  possible  explana- 
tion of  the  decision  seems  to  be  that  suggested  by  the  Master 
of  the  Rolls.  It  appears  to  me  that  the  sooner  the  case  disap- 
pears from  the  text-books  the  better. 

Application  refused. 


*  That  part  of  the  opinion  which  deals  with  the  Locomotive  Act  of 
1865  is  omitted. 


412  PARTNERSHIP  BY  ESTOPPEL 


SECTION  2.  — WHEN  A  CREDITOR  LOSES  HIS 
RIGHT  TO  PROCEED  AGAINST  THE  PERSON 
HELD  OUT  AS  PARTNER. 


SCARF  V.  JARDINE. 
In  the  House  of  Lords,  1882. 

Lazu  Reports,  7  Appeal  Cases,  345. 

Appeal  from  a  judgment  of  the  Court  of  Appeal,  re- 
versing a  judgment  in  favor  of  the  defendant  given  by  Den- 
man  J.  ^ 

Lord  Selborne,  L.C.  : — My  Lords,  the  facts  in  this 
case  are  few  and  simple,  but  they  raise  a  question  which 
may  be  of  some  general  importance  and  which  seems  from 
what  has  been  stated  at  the  Bar,  to  be  as  yet  undetermined 
by  authority. 

There  was  a  firm  carrying  on  business,  under  the  name 
of  W.  H.  Rogers  &  Co.,  in  Manchester,  with  which  the 
plaintiff,  Mr.  Jardine,  had  dealings.  It  consisted  at  first 
of  two  partners,  the  defendant,  Mr.  Scarf,  and  Mr.  W.  H. 
Rogers.  On  the  27th  of  July.  1877  those  two  persons  dis- 
solved the  partnership  between  them,  and  another  person, 
named  Beech,  joined  Mr.  Rogers,  and  they  carried  on  the 
same  business,  under  the  same  name  and  at  the  same  place, 
from  that  time  forward.  Of  this  the  Plaintiff,  Mr.  Jardine, 
knew  nothing  until  the  25th  of  February,  1878.  In  the 
meantime,  in  January,  1878,  goods  were  ordered  from  him 
on  behalf  of  the  firm  carrying  on  business  under  the  name  of 
W.  H.  Rogers  &  Co.,  according  to  the  ordinary  course  of 
business — which  I  presume  was  the  same  as  had  prevailed 
before  the  dissolution  of  partnership  in  the  previous  month 


*The   statement  of  facts   and  notes   of  the  arguments   of  counsel 
printed  in  the  Report  are  omitted. 


SCARF  f.  JARDIXE  413 

of  July — goods  were  ordered  of  the  plaintiff,  and  were  de- 
livered by  him  in  February,  1878,  at  the  place  of  business  of 
the  firm.  At  the  time  when  they  were  ordered,  and  at  the 
time  when  they  were  delivered,  he  was  ignorant  of  the  dis- 
solution of  partnership  which  had  in  fact  taken  place,  and 
of  the  fact  that  the  business  was  then  being  carried  on  not 
by  Mr.  Scarf  and  ]\Ir.  Rogers  but  by  Mr.  Rogers  and  Mr. 
Beech.  He  became  aw^are  of  those  facts  upon  the  25th  of 
February,  1878,  on  receiving  a  circular  dated  on  the  21st  of 
the  same  month  of  February,  by  which  notice  was  given  to 
him,  and  by  which  the  date  of  the  dissolution  of  partnership 
was  mentioned  as  having  taken  place  on  the  27th  of  July, 
1877 ;  and  it  was  at  the  same  time  stated  that  all  debts  owing 
to  or  by  the  old  firm  would  be  received  and  paid  by  INIr. 
Rogers  alone,  who  would  continue  to  carry  on  the  business 
as  theretofore,  in  partnership  with  ^Ir.  Beech,  under  the 
same  style  and  firm. 

The  plaintiff  afterwards  supplied  other  goods  to  the 
new  firm.  He  made  no  break  in  the  account  in  his  books. 
He  rendered  an  account  consisting  of  the  old  and  new  debts 
— by  "the  old"  I  mean  the  debt  which  had  been  incurred  be- 
fore he  became  aware  of  the  dissolution  of  partnership :  by 
"the  new"  I  mean  that  which  had  been  incurred  afterwards 
— he  rendered  that  account  to  the  new^  firm.  He  had  some 
correspondence  with  them,  looking  to  them  as  the  persons 
from  whom  he  might  expect  payment  of  the  whole  of  that 
demand ;  and  they  on  the  other  hand  replied  in  the  corre- 
spondence as  being  prepared  to  liquidate  the  debt ;  they  made 
some  payment  on  account,  and  they  gave  a  cheque  for  the 
balance  on  the  22nd  of  July,  1878.  which  was  post-dated  a 
week.  That  cheque  when  presented  w^as  dishonoured ;  and  on 
the  7th  of  August,  1878,  the  plaintiff  commenced  an  action 
against  Rogers  and  Beech  for  the  balance,  which  included 
the  present  demand,  that  is  to  say  included  the  demand  for 
the  goods  which  had  been  ordered  in  January  and  supplied 
in  February  before  notice  of  the  dissolution  of  partnership. 


414  PARTNERSHIP  BY  ESTOPPEL 

That  action  was  stopped,  not  by  any  discontinuance  on  the 
plaintiff's  part,  but  by  the  faikire  of  the  new  firm,  which 
went  into  liquidation  on  the  i6th  of  August,  1878.  Under 
this  liquidation  the  plaintiff  proved  as  a  creditor  of  the  new 
firm,  by  an  affidavit  in  which  he  swore  that  Rogers  and 
Beech  were  justly  and  truly  indebted  to  him  in  the  sum  of 
£  125,  19^-.  id.  for  goods  sold  and  delivered  by  him  to  Rog- 
ers and  Beech,  that  sum  including  the  goods  in  question. 

Your  Lordships,  I  think,  must  take  it  upon  the  facts 
as  they  appear  that  no  objection  was  made  to  that  proof ;  that 
it  was  never  retracted ;  that  it  was  admitted ;  and  although  it 
does  not  appear  upon  the  proceedings  that  a  dividend  has 
been  paid  under  it,  yet  at  all  events,  for  anything  that  your 
Lordships  know  to  the  contrary,  that  may  be  the  case,  or 
may  be  the  case  hereafter. 

Now  after  the  liquidation  and  after  the  proof  the  pres- 
ent action  was  brought  by  the  plaintiff  against  Mr.  Scarf, 
who  in  point  of  fact  had  ceased  to  be  a  partner  in  July,  1877, 
who  in  point  of  fact  had  given  no  authority  to  order  the 
goods  in  question  upon  his  credit,  and  who  as  between 
himself  and  the  persons  who  did  order  the  goods  was  at  the 
time  when  they  were  supplied  a  stranger  to  the  business.  On 
the  other  hand,  the  persons  who  actually  ordered  those 
goods  and  to  whom  they  were  supplied  were  Rogers  and 
Beech.  They  were  the  persons  alone  interested  in  the  busi- 
ness, and  they  were  undoubtedly,  upon  ordinary  principles, 
liable  for  what  they  so  ordered.  The  defendant  also  might 
be  held  liable — about  that  there  can  be  no  doubt;  because 
the  principle  of  law,  which  is  stated  in  Lindley  on  Partner- 
ship (Vol.  i.  p.  429,  3rd  Ed.)  is  incontrovertible,  namely 
that  "when  an  ostensible  partner  retires,  or  when  a  partner- 
ship between  several  known  partners  is  dissolved,  those  who 
dealt  with  the  firm  before  a  change  took  place  are  entitled 
to  assume,  until  they  have  notice  to  the  contrary,  that  no 
change  has  occurred;"  and  the  principle  on  which  they  are 
entitled  to  assume  it  is  that  of  the  estoppel  of  a  person  who 


SCARF  z:  JARDINE  415 

has  accredited  another  as  his  known  agent  from  denying  that 
agency  at  a  subsequent  time  as  against  the  persons  to  whom 
he  has  accredited  him,  by  reason  of  any  secret  revocation. 
Of  course  in  partnership  there  is  agency — one  partner  is 
agent  for  another;  and  in  the  case  of  those  who  under' the 
direction  of  the  partners  for  the  time  being  carry  on  the 
business  according  to  the  ordinary  course,  where  a  man  has 
estabhshed  such  an  agency  and  has  held  it  out  to  others,  they 
have  a  right  to  assume  that  it  continues  until  they  have  notice 
to  the  contrary. 

There  was  therefore  in  this  case  undoubtedly  a  state  of 
circumstances  which  would  have  entitled  the  plaintiff,  if  he 
had  thought  fit,  to  hold  Mr.  Scarf  liable,  the  credit  being 
given  to  him  and  to  Rogers,  there  being  no  knowledge  on 
the  part  of  the  plaintiff  of  the  dissolution  of  partnership ; 
no  knowledge  of  any  revocation  of  the  agency  at  the  time 
when  these  goods  were  delivered.  On  the  other  hand,  if  you 
look  not  to  the  estoppel  but  to  the  fact,  the  plaintiff  was  en- 
titled to  hold  the  persons  who  actually  gave  the  order  and 
received  the  goods,  and  were  interested  in  the  profit  and 
loss  of  the  firm  which  ordered  them,  liable  to  him;  those 
persons  being  not  Scarf,  Rogers,  and  Beech,  or  Scarf  and 
Rogers,  but  Rogers  and  Beech  alone. 

Now  it  appears  to  me  that  the  real  question  which  your 
Lordships  have  to  determine  is  not  as  it  was  treated  in  the 
Court  below — in  I  think  both  the  Courts  below — namely,  the 
question  of  what  is  called  "novation;"  but  it  is  this,  whether 
in  that  state  of  circumstances  there  was  a  concurrent  joint 
liability  of  the  three  persons.  Scarf,  Rogers  and  Beech,  upon 
the  principles  which  I  have  stated ;  or  whether  the  plaintiff 
had  a  right  to  make  his  choice  whether  he  would  sue  those 
who  were  liable  by  estoppel,  or  sue  those  who  were 
liable  upon  the  facts.  Put  it  as  I  can  I  am  unable  to 
understand  how  there  could  have  been  a  joint  liability  of 
the  three.  The  two  principles  are  not  capable  of  being 
brought  into  plav  together ;  you  cannot  at  once  rely  upon 


416  PARTNERSHIP  BY  ESTOPPEL 

estoppel  and  set  up  the  facts,  and  if  the  estoppel  makes  A 
and  B  liable,  and  the  facts  make  B  and  C  liable,  neither  the 
estoppel  nor  the  facts,  nor  any  combination  of  the  two  can 
possibly  make  A,  B  and  C  all  liable  jointly. 

Therefore  it  appears  to  me  that  if  the  plaintiff  chose 
to  go  upon  the  facts  and  to  make  the  persons  who  actually 
ordered  and  got  the  benefit  of  the  goods  his  debtors  (which 
he  had  a  plain  and  certain  right  to  do),  he  entirely  dis- 
avowed the  estoppel  and  could  no  longer  set  it  up.  If  on  the 
other  hand  he  choose  to  go  upon  the  estoppel,  then  Beech 
being  a  stranger  to  the  liability  upon  that  footing,  he  could 
only  sue  Scarf  and  Rogers.  One  way  of  testing  it  would  be 
by  inquiring  what  was  the  rule  under  the  old  system  of  plead- 
ing. If  at  that  time  Scarf  and  Rogers  had  been  sued,  could 
they  have  pleaded  in  abatement  that  Beech  ought  also  to  be 
joined  as  being  also  liable  ?  I  think  most  clearly  they  could 
not.  And  upon  the  other  hand  if  Rogers  and  Beech  had 
been  sued,  still  more  impossible  would  it  have  been  for  them 
to  plead  in  abatement  that  Scarf  ought  also  to  be  joined,  for 
he  was  neither  a  partner  when  the  goods  were  ordered,  nor 
as  between  him  and  themselves  could  any  liability  possibly 
have  attached  to  him. 

It  seems  to  me  therefore  that  the  plaintifif  was  necessar- 
ily put  to  his  election.  He  might  hold  either  Rogers  and 
Scarf,  or  Rogers  and  Beech  liable ;  he  could  not  hold  Rogers, 
Scarf,  and  Beech  all  liable  together. 

[The  Lord  Chancellor,  coming  to  the  conclusion  that  the 
plaintiff  had  elected  to  hold  Rogers  and  Beech,  moved  that 
the  order  under  appeal  be  reversed,  and  that  the  appellant 
"have  his  costs  in  the  Court  of  Appeal  and  in  this  House."] 

Lord  Blackburn : 

And  then  comes  the  question  which  ought  to  have  been 
decided,  not  whether  there  was  a  novation  (upon  which  if 
probably  if  I  had  thought  that  that  was  the  question  I  should 
have  agreed  with  the  majority  of  the  Court  of  Appeal)  but 


SCARF  z'.  JARDIXE  417 

whether  the  Plaintiff  had  before  the  30th  of  September,  the 
date  at  which  he  for  the  first  time  made  a  claim  against 
Scarf,  made  a  final  determination  of  the  election  by  which 
he  had  to  choose  which  of  the  two  sets  of  parties  he  wauld 
hold  liable. - 

Now  on  that  question  there  are  a  great  many  cases ;  they 
are  collected  in  the  notes  to  Ditinpor's  Case  (i  Sm.  L.  C.  8th 
ed.  47,  54.)  and  they  are  uniform  in  this  respect,  that  where 
a  man  has  an  option  to  choose  one  or  other  of  two  inconsist- 
ent things,  when  once  he  has  made  his  election  it  cannot  be 
retracted,  it  is  final  and  cannot  be  altered.  "Quod  semel 
placuit  in  electionibus,  amplius  displicere  non  potest."  That 
is  Coke  upon  Littleton  (146  a),  and  I  do  not  doubt  that 
there  are  many  older  authorities  to  the  same  effect ;  but  that 
rule  has  been  uniformly  acted  upon  from  that  time  at  least 
down  to  the  present.  When  once  there  has  been  an  election 
to  do  one  of  the  two  things  you  cannot  retract  it  and  do  the 
other  thing;  the  election  once  made  is  finally  made. 

But  upon  that  comes  the  question  which  is  the  one  that 
now  arises,  whether  there  was  evidence  here  on  which  your 
Lordships  should  find  as  a  fact  that  there  was  an  election. 
In  Clcugh  V.  London  and  North  Western  Raikvay  Co., 
(Law  Rep.  7  Ex.  34.)  the  Exchequer  Chamber  had  to  con- 
sider that  question  a  good  deal  in  a  case  of  some  importance 
in  which  the  subject  was  carefully  considered.  I  wrote  it 
myself  and  I  say  nothing  further  about  it  than  this,  that  it 
liad  the  full  assent  of  all  the  other  Judges.  The  result  of 
what  is  there  said  is  that  where  there  is  a  right  to  elect  the 
party  is  not  bound  to  elect  at  once ;  he  may  wait  and  think 
which  way  he  will  exercise  his  election,  so  long  as  he  can  do 
so  without  injuring  other  persons,  and  accordingly  in  that 
particular  case  it  was  held  that  he  had  not  lost  his  right  to 


"Only  so  much  of  his  opinion  as  relates  to  whether  tlie  plaintiff, 
before  attempting  to  hold  Rogers  and  Scarf,  had  elected  to  hold  Rogers 
and  Beech,  is  reprinted.  The  learned  Lord  agreed  with  the  Lord 
Chancellor,  that  the  plaintiff  was  put  to  his  election,  and  rould  not  sue 
all  three  as  partners. 


418  PARTNERSHIP  BY  ESTOPPEL 

elect  by  a  reasonable  waiting  under  rather  peculiar  circum- 
stances ;  but  when  he  has  once  fully  elected  it  is  final. 

I  may  also  refer  to  the  case  of  Jones  v.  Carter  (15  M. 
&  W.  718)  as  most  neatly  stating  the  point.  The  principle, 
I  take  it,  running  through  all  the  cases  as  to  what  is  an  elec- 
tion is  this,  that  where  a  party  in  his  own  mind  has  thought 
that  he  would  choose  one  of  two  remedies,  even  though  he 
has  written  it  down  on  a  memorandum  or  has  indicated  it  in 
some  other  way,  that  alone  will  not  bind  him ;  but  so  soon  as 
he  has  not  only  determined  to  follow  one  of  his  remedies  but 
has  communicated  it  to  the  other  side  in  such  a  way  as  to 
lead  the  opposite  party  to  believe  that  he  has  made  that 
choice,  he  has  completed  his  election  and  can  go  no  further ; 
and  whether  he  intended  it  or  not,  if  he  has  done  an  un- 
equivocal act — I  mean  an  act  which  would  be  justifiable  if 
he  had  elected  one  way  and  would  not  be  justifiable  if  he  had 
elected  the  other  way — the  fact  of  his  having  done  that  un- 
equivocal act  to  the  knowledge  of  the  persons  concerned  is 
an  election.  In  Jones  v.  Carter  (15  M.  &  W.  718)  (the 
principle  is  general  though  the  particular  application  is  pecu- 
liar) the  question  was  whether  a  man  who  had  a  right  to 
avoid  a  lease  had  avoided  it  or  not.  He  had  at  first  brought 
a  writ  of  ejectment  for  the  purpose  of  avoiding  it,  by  which 
in  modern  times  you  do  not  actually  enter;  but  it  had  pro- 
ceeded so  far  that  the  defendant  had  entered  into  a  consent 
rule ;  and  the  defendant  having  entered  into  a  consent  rule 
by  which  he  had  admitted  the  entry,  the  Court  held  that  it 
must  be  taken  as  if  the  plaintiff  had  entered,  and  that  inas- 
much as  the  entry  to  avoid  a  lease  was  unequivocal  in  its 
nature  he  could  not  afterwards  say  "The  lease  was  not  void." 

Now  that  is  the  question  which  I  think  the  Court  below 
ought  to  have  decided  and  which  I  think  your  Lordships 
now,  having  power  to  find  all  the  facts,  have  to  decide  upon 
the  evidence.  Was  there,  before  the  30th  of  September, 
which  was  the  date  when  the  plaintiff  first  came  upon  Scarf, 
an  unequivocal  election  to  take  Beech  as  his  debtor?     I  do 


SCARF  v.  JARDIXE  419 

not  think  that  at  first  there  was.  I  do  not  think  that  the 
mere  fact  of  his  having  continued  to  enter  in  his  books  these 
goods  along  with  others  which  he  had  undoubtedly  con- 
tracted to  supply  after  the  25th  of  February,  when  he  had  full 
notice  (entering  them  in  one  account),  would  preclude  him; 
because  I  think  as  I  said  before,  that  it  was  merely  an  ex- 
pression of  his  own  private  intention  and  opinion,  w'hich  did 
not  bind  the  matter  until  it  was  communicated  to  the  other 
side,  which  it  never  was.  I  do  not  think  that  his  having 
demanded  money  from  Rogers  after  he  knew  that  Rogers 
was  carrying  on  the  new  firm  of  Rogers  &  Beech  will  do,  for 
the  reasons  given  by  Brett  L.J.,  that  the  notice  of  dissolu- 
tion distinctly  said  "Whatever  Rogers  &  Scarf  ow^e,  go  to 
Rogers,  and  Rogers  will  pay  it."  But  then  the  evidence  goes 
further.  I  am  not  sure  that  taking  a  cheque  from  Rogers 
&  Beech  as  payment  was  enough  to  make  an  election,  be- 
cause I  think  that  in  acting  on  the  authority  given  by  Scarf 
to  Rogers  to  pay  the  debts  for  him  and  Scarf,  Rogers  might 
pay  money  by  the  new  firm's  cheque  or  otherwise  as  he 
pleased.  But  then  the  plaintiff  goes  on  and  issues  a  writ 
against  Rogers  &  Beech — he  sues  Beech.  I  am  unable  to 
conceive  a  more  unequivocal  act;  he  has  thereby  adopted 
Beech  as  his  debtor  at  that  time.  I  do  not  think  its  going 
to  judgment  or  not  going  to  judgment  is  material.  How 
he  could  possibly  do  a  more  unequivocal  act  than  issuing  a 
writ  against  Rogers  &  Beech  I  cannot  imagine.  The  result 
of  his  issuing  the  writ  was  that  Rogers  &  Beech  not  being 
able  to  get  time  to  obtain  terms  went  into  liquidation,  and 
then  the  plaintiff  sent  in  his  affidavit  claiming  to  prove  against 
Rogers  &  Beech  for  this  sum  which  is  now-  in  dispute,  and 
also  for  the  subsequent  debts  treating  them  all  as  one.  I 
think  that  also  is  an  unequivocal  act.  And  taking  the  whole 
together  I  can  bring  myself  in  no  way  to  doubt,  that  upon 
the  facts  we  ought  to  find  that  Mr.  J^rdine  having  the  right 
of  election  between  holding  Beech  lial)le  anrl  holding  Scarf 
liable,  had,  before  he  ever  came  upon    Scarf,  finally  deter- 


420  PARTNERSHIP  BY  ESTOPPEL 

mined  his  election  and  taken  Beech  as  liable,  and  that  he 
could  not  hold  both  Scarf  and  Beech  liable. 

I  am  consecjuently  of  opinion  that  the  judgment 
should  be  for  the  defendant,  though  not  upon  the  ground  on 
which  it  was  originally  put,  namely  that  there  was  a  nova- 
tion, but  upon  the  ground  that  Scarf  never  was  liable,  for 
this  reason,  that  before  any  step  was  taken  to  make  him 
liable,  a  final  and  conclusive  election  had  been  made  to  hold 
Beech  liable,  which  involved  impliedly  that  Scarf  was  not.^ 

Order  appealed  from  reversed. 


'  The  opinions  of  Lords  Watson  and  Bramwell  in  agreement  with 
those  reprinted  are  omitted. 


CHAPTER   VII. 


LIMITED   PARTNERSHIP. 


AMES  V.  DOWNING. 
In  the  Surrogate's  Court  of  New  York,  1850. 

I  Bradford's  New  York  Surrogate's  Reports,  321. 

The  Surrogate  [Alexander  W.  Bradford]  :  The  tes- 
tator, at  the  time  of  his  decease,  was  a  special  partner  of 
Mr.  Hicks,  the  executor,  in  business  in  this  city;  and  the 
position  has  been  taken  by  the  counsel  for  the  executors, 
that  the  firm  was  not  dissolved,  but  notwithstanding  the 
testator's  decease,  continued  till  the  expiration  of  the  term 
limited  for  its  duration.^ 

The  idea  at  first  impression  is  apt  to  win  attention  if 
not  favor,  but  on  closer  scrutiny  cannot,  I  think,  be  upheld. 
The  legislation  which  brought  into  existence  among  us  this 
form  of  partnership,  had  for  its  main  object  the  encour- 
agement of  commerce  by  permitting  the  investment  of  capi- 
tal in  trade,  without  danger  to  the  public,  or  risk  to  the  spe- 
cial partner  beyond  the  extent  of  the  amount  invested ;  and 
in  determining  the  legal  consequences  incidental  to  the  intro- 
duction of  such  an  institution,  there  seems  to  me  no  reason 
for  departing  from  the  rules  of  the  Common  Law,  any  fur- 
ther than  is  fairly  and  naturally  requisite  to  give  full  effect  to 
the  intent  of  the  statute ;  resting  upon  the  presumption  that 
the  Legislature  having  expressed  the  points  in  which  the 
Common  Law  was  intended  to  be  abrogated,  that  line  should 
not  by  judicial  construction  be  extended,  except  by  way  of 
reasonable  and  necessary  inference  to  effectuate  the  general 
objects  of  the  statute.  The  special  partnership  is  by  no 
means  a  complete  anomaly.     By  the  statute  it  is  termed 

'Only  so  much  of  the  opinion  as  relates  to  this  question  is  reprinted. 

(421) 


422  LIMITED  PARTNERSHIP 

a  partnership,  and  both  as  to  the  rights  of  the  parties  to  the 
contract,  and  as  to  the  world,  it  is  in  itself  a  proper  partner- 
ship, except  as  it  limits  the  liability  of  the  special  partner, 
and  restricts  his  control  over  the  business  of  the  firm. 
The  members  are  partners^  and  by  slight  irregularities 
may  easily  be  turned  into  general  partners.  The  statute 
terms  them  partners;  except  for  the  statute  they  would  be 
general  partners,  and  from  participating  in  the  profits,  it 
would  seem  to  be  a  just  consequence  that  they  are  partners 
in  every  sense,  subject  to  liabilities  and  enjoying  privileges 
as  partners  in  every  particular,  except  as  otherwise  specially 
provided.  The  Common  Law  regulates  the  mutual  rights, 
and  duties,  and  liabilities  of  partners,  and  governs  these 
limited  partnerships,  in  every  respect  not  excepted  out  of 
the  general  rule  by  this  statute.  The  12th  Section  pro- 
vides that  every  alteration  which  shall  be  made  in  the  names 
of  the  partners  shall  be  deemed  a  dissolution  of  the  part- 
nership, and  the  necessary  effect  of  an  assignment  by  a  spe- 
cial partner,  of  his  interest  in  the  firm,  would  be  to  alter 
the  name  of  the  special  partner,  and  thus  to  work  a  disso- 
lution. Such  would  likewise  seem  to  be  the  consequence 
of  the  death  of  the  special  partner,  which  effects  an  altera- 
tion in  the  name,  by  operation  of  law,  through  the  medium 
of  an  administrator.  The  i8th  Section  declares  also, 
that  the  general  partners  shall  be  liable  to  account  to  each 
other  and  to  the  special  partners  in  law  and  equity  as 
other  partners  now  are  by  law ;  and  the  24th  Section  pro- 
vides, that  no  dissolution  by  the  acts  of  the  parties  shall  take 
place  previous  to  the  time  specified  for  the  duration  of  the 
partnership,  without  public  notice.  There  appears  to  be 
nothing  in  the  act  incongruous  with  the  idea,  that  the  part- 
nership is  governed  by  the  rules  applicable  to  general  part- 
nerships, except  in  the  particular  cases  enumerated.  There 
is  nothing  irreconcilable  with  the  dissolution  of  the  part- 
nership by  operation  of  law  in  the  usual  cases.  I  have 
looked  into  the  statutes  of  several  of  the  States,  where 
similar  laws  have  been  enacted,  and  while  they  all  imply 


A^IES  V.  DOWXIXG  423 

that  a  dissolution  may  occur  by  operation  of  law,  those 
of  Massachusetts,  Michigan,  Rhode  Island  and  Virginia, 
expressly  admit  of  that  mode  of  dissolution.  The  Code  of 
Louisiana  declares,  that  all  partnerships  shall  terminate  with 
the  death  of  one  of  the  partners,  and  quite  a  number  of  these 
acts  prescribe,  that  in  cases  not  provided  for,  the  law  relating 
to  general  partnerships  shall  govern.  [Rez'.  St.  Mass.,  306; 
Louisiana  Code,  2799,  2810,  2851;  Rl-z'.  St.  Maine,  264; 
Laws  Mississippi,  839;  Rez'.  St.  Michig.,  156;  R.  S.  N.  J., 
872;  Lozi's  Penn.,  620;  Lazvs  R.  L,  2S2;  Virginia  Code, 
583 ;  Lazi's  Connecticut,  528 ;  Lazj^'s  Indiana,  429 ;  Code  of 
Georgia,  Tty^.)  Now  if  any  other  principle  is  admitted, 
what  is  the  result?  If  the  death  of  the  special  partner  does 
not  cause  a  dissolution,  shall  that  of  the  general  partner 
have  that  effect?  If  the  death  of  the  special  partner  does 
not  dissolve  the  firm,  shall  his  executor  or  administrator  be 
the  partner?  If  so,  does  not  that  introduce  a  new  name  into 
the  firm?  And  if  it  does,  then  the  executor  or  administrator 
becomes  a  general  partner,  and  if  a  general  partner,  then  he 
can  dissolve  the  firm  (2  R.  S.,  3^/  ed.,  §  12,  p.  50),  or  on 
the  other  hand,  the  estate  he  represents  may  be  thrown  into 
the  hazards  of  a  general  partnership,  and  the  executor  or 
administrator  have  to  attend  personally  to  the  transaction 
of  a  regular  partnership  business.  The  above  statement  of 
some  of  the  embarrassing  results  which  would  flow  from 
this  novel  proposition,  should  induce  hesitation  and  caution 
in  admitting  it. 

Xo  doctrine  is  more  universally  established,  than  that 
by  the  death  of  any  one  of  the  partners  the  partnership  is 
ipso  facto  dissolved ;  and  this  not  only  as  to  the  deceased 
partner,  but  also  as  between  all  the  survivors,  and,  how- 
ever numerous  the  association  may  be.  The  reasoning 
upon  which  this  result  is  attained,  as  well  as  the  rule  itself, 
is  amply  illustrated  by  the  Civilians,  the  doctrine  having 
its  foundation  in  the  Civil  Law,  though  it  has  been  recog- 
nized and  adopted,  to  its  fullest  extent,  by  the  Common 
Law.      The  personal   qualities,   skill,   cliaracter,   and  credit 


424  LIMITED  PARTNERSHIP 

of  each  partner  enter  so  thoroughly  into  every  contract  of 
this  kind,  that  the  law  very  wisely  considers  it  a  personal 
contract,  expiring  with  death.  Though  these  reasons  are 
not  so  apposite  to  a  special  as  to  a  general  copartnership, 
yet  they  are  measurably  applicable.  It  is  true  that  a  spe- 
cial partner  has  no  control  over  the  business  of  the  firm, 
and  contributes  as  a  matter  of  duty,  no  portion  of  his 
time,  labor,  or  abilities,  towards  the  management  of  its 
affairs,  but  he  may  from  time  to  time  examine  into  the 
state  and  progress  of  the  partnership  concerns,  and  advise 
as  to  their  management.  This  brings  him  into  the  most 
intimate  relations  with  the  general  partner;  and,  in  view 
of  his  right  to  give  advice,  it  is  evident  the  general  part- 
ner may  perhaps  have  built  up  well-founded  hopes  of  a 
successful  and  thriving  trade,  upon  the  experience,  wis- 
dom, and  abilities  of  his  associate,  expectations  sure  to  be 
destroyed  by  death.  How  often  is  it  the  case  that  a  suc- 
cessful merchant,  retiring  from  the  cares  of  active  business, 
enters  into  a  partnership  of  this  kind,  where  his  knowledge 
and  sagacity,  and  his  influence,  are  important  inducements 
with  the  general  partner  to  enter  into  the  contract.  Does 
a  limited  partnership  survive  the  death  of  the  special  part- 
ner? Then  it  is  compulsory  on  the  survivor  to  receive  into 
the  partnership,  at  all  hazards,  the  executor  or  administra- 
tor of  the  deceased,  his  next  of  kin,  a  creditor  or  stranger 
taking  administration,  or  the  assignee  of  such  personal 
representatives ;  and  whatever  may  be  the  inconvenience 
and  hardship  of  being  thus  thrown,  against  his  will,  into 
connection  with  a  stranger,  or  perchance  with  some  one 
personally  disagreeable,  or  hostile,  the  general  partner 
must  submit  to  the  examination  of  the  books,  the  visits, 
and  the  advice  of  the  incomer.  (Gozv  on  Part.,  §  3,  /'. 
220;  Collycr,  2>d  Am.  cd.,  p.  99.)  The  joint  stock  com- 
panies, many  of  which  exist  in  England,  often  comprise  a 
large  number  of  persons,  and  though  generally  managed 
by  officers  chosen  at  elections  held  by  the  stockholders, 
they  are  liable  to  the  application  of  the  same  rules  of  law 


AMES  V.  DOWNING  425 

in  regard  to  death  and  dissolution,  as  general  partnerships, 
unless  provision  be  made  to  meet  the  case,  in  the  deed  of 
settlement,   or  articles  of  agreement.      (Collyer,   §§    1112, 

The  system  of  limited  partnerships,  which  wa's  intro- 
duced by  statute  into  this  State,  and  subsequently  very 
generally  adopted  in  many  other  States  of  the  Union,  was 
borrowed  from  the  French  Code.  (3  Kent,  36;  Code  de 
Commerce,  19,  23,  24.)  Under  the  name  of  la  Societe  en 
commandite,  it  has  existed  in  France  from  the  time  of  the 
middle  ages ;  mention  being  made  of  it  in  the  most  an- 
cient commercial  records,  and  in  the  early  mercantile  regu- 
lations of  Marseilles  and  Montpelier.  In  the  vulgar  La- 
tinity  of  the  middle  ages  it  was  styled  couimenda,  and  in 
Italy  accom.enda.  In  the  statutes  of  Pisa  and  Florence,  it 
is  recognized  so  far  back  as  the  year  11 60;  also  in  the  or- 
dinance of  Louis-le-Hutin,  of  131 5;  the  statutes  of  Mar- 
seilles, 1253;  of  Geneva,  of  1588.  In  the  middle  ages  it 
was  one  of  the  most  frequent  combinations  of  trade,  and 
was  the  basis  of  the  active  and  widely-extended  commerce 
of  the  opulent  maritime  cities  of  Italy.  It  contributed 
largely  to  the  support  of  the  great  and  prosperous  trade 
carried  on  along  the  shores  of  the  IMediterranean,  was 
known  in  Languedoc,  Provence,  and  Lombardy,  entered 
into  most  of  the  industrial  occupations  and  pursuits  of  the 
age,  and  even  travelled  under  the  protection  of  the  arms 
of  the  Crusaders  to  the  city  of  Jerusalem.  At  a  period 
when  capital  was  in  the  hands  of  nobles  and  clergy,  who, 
from  pride  of  caste,  or  canonical  regulations,  could  not  en- 
gage directly  in  trade,  it  afforded  the  means  of  secretly 
embarking  in  commercial  enterprises,  and  reaping  the  pro- 
fits of  such  lucrative  pursuits,  without  personal  risk;  and 
thus  the  vast  wealth,  which  otherwise  would  have  lain  dor- 
mant in  the  coffers  of  the  rich,  became  the  foundation,  by 
means  of  this  ingenious  idea,  of  that  great  commerce 
which  made  princes  of  the  merchants,  elevated  the  trading 
classes,  and  brought  the  Commons  into  position  as  an  influ- 


426  LIMITED  PARTXERSHIP 

ential  estate  of  the  commonwealth.  Independent  of  the 
interest  naturally  attaching  to  the  history  of  a  mercantile 
contract,  of  such  ancient  origin,  but  so  recently  introduced 
where  the  general  partnership,  known  to  the  Common 
Law,  has  hitherto  existed  alone,  I  have  been  led  to  refer  to 
the  facts  just  stated,  for  the  purpose  of  showing  that  the 
special  partnership  is,  in  fact,  no  novelty,  but  an  institution 
of  considerable  antiquity,  well  known,  understood,  and 
regulated.  Ducange  defines  it  to  be,  "Societas  mercato- 
RUM  qua  iini  socioruiii  tota  negotiat'wnis  ciira  coinmenda- 
tur,  certis  conditionibus."  It  was  always  considered  a 
proper  partnership,  societas,  with  certain  reserves  and  re- 
strictions; and  in  the  ordinance  of  Louis  XIV.,  of  1673, 
it  is  ranked  as  a  regular  partnership.  In  the  Code  of  Com- 
merce it  is  classed  in  the  same  manner.  I  may  add,  as  an 
important  fact,  for  the  explanation  of  a  distinction  to  which 
I  shall  shortly  advert,  that  the  French  Code  permits  a  spe- 
cial partnership,  of  which  the  capital  may  be  divided  into 
shares,  or  stock,  transmissible  from  hand  to  hand.  In  such 
a  case,  the  death  of  a  special  partner  does  not  dissolve 
the  firm,  the  creation  of  transmissible  shares  being  a  proof 
that  the  association  is  formed  rcspcctn  ncgotii,  and  not  rc- 
spectii  pcrsonanun;  but  even  in  such  a  partnership  the 
death  of  the  general  partner  effects  a  dissolution,  unless  it 
is  expressly  stipulated  otherwise.  But,  says  M.  Trop- 
long,  it  would  be  wrong  to  extend  the  rule  that  a  partner- 
ship, of  which  the  capital  is  divided  into  transmissible 
shares,  is  not  dissolved  by  the  death  of  a  shareholder,  to  a 
special  partnership,  the  capital  of  which  is  not  so  divided. 
The  statute  of  New  York  recognizes  only  the  latter  kind  of 
partnership,  the  names  of  the  parties  being  required  to  be 
registered,  and  any  change  in  the  name  working  a  dissolu- 
tion, and  turning  the  firm  into  a  general  partnership.  Such 
a  partnership  has  always  been  held  to  be  dissolved  by  the 
death  of  the  special  partner.  The  Society,  says  the  au- 
thor just  cited,  "restc  alors  sous  1' empire  du  droit  com- 
mun.     Elle  a  forme  entre  le  comuianditaire  et  le  comman- 


AMES  z:  DOWXIXG  427 

dife,  iin  lien  qui  n'a  pas  etc  siihordoniic  an  caprice  de  muta- 
tions imprevucs;  ellc  a  cngendrc  dcs  rapports  miitiiels  dc 
confiance,  que  le  connnandifc  ne  pent  ctrc  force  d'etendrc 
0  dcs  personncs  etrangeres."  This  partnership  remains 
under  the  dominion  of  the  Common  Law.  It  has  created 
between  the  special  and  the  general  partner  a  tie,  which  is 
not  subjected  to  the  caprice  of  unforeseen  changes;  it  has 
produced  mutual  relations  of  confidence,  which  the  general 
partner  cannot  be  forced  to  extend  to  strangers.  {M.  Trop- 
long  Com.;  dit  contrat  de  Socicte  civile,  &c.,  T.  i.  Preface, 
57'  §  Z77^  &-<:■;  T.  2,  §  888,  p.  368.)  The  French  jurists 
generally  take  the  same  position,  defining  the  special  part- 
nership as  a  proper  partnership,  and  applying  the  law  of 
dissolution  by  death  to  all.  (Pothicr  Traite  du  contrat 
de  Socicte,  ch.  2,  §  2 ;  ch.  8,  §  3 ;  Merlin  Repertoire,  de  Ju- 
risprudence, Art  Societe,  §  7;  Duranton,  Droit  Francais, 
torn.  I/.  1.  3,  Tit.  9,  §  470.)  Pardessus  discusses  the  ques- 
tion somewhat  at  length.  (Droit  Commercial,  torn.  4,  Pt. 
5,  Tit.  3,  ch.  I,  §  4.)  It  might  be  thought,  he  says,  with 
some  appearance  of  plausibility,  that  the  rule  of  a  dissolu- 
tion by  death  should  be  limited  to  general  partnerships,  in 
forming  which,  the  probity  and  intelligence  of  each  mem- 
ber have  been  reciprocally  taken  into  consideration.  In- 
deed, the  special  partnership  does  not  suppose  on  the  part 
of  the  general  partners  any  personal  confidence  in  the  spe- 
cial partners ;  and  as  the  interest  and  the  rights  of  the 
latter  are  exclusively  limited  to  their  shares,  it  would  seem 
they  were  not  modified  by  their  decease,  and  their  heirs 
called  to  take  their  place  could  have  no  right  to  insist  that 
death  has  dissolved  the  firm,  nor  the  general  partners  insist 
upon  that  result.  These  reasons,  to  question  the  general 
rule,  appear,  nevertheless,  to  yield  to  others  more  decisive. 
The  persons  and  the  character  of  the  special  partners  have 
been  regarded  by  the  general  partners  when  they  formed 
this  kind  of  association.  The  special  partners,  are,  in 
effect,  to  a  greater  or  less  extent,  called  to  the  annual  ac- 
countings, to  meetings  for  the  settlement  of  the  profits  and 


428  LIMITED  PARTNERSHIP 

losses,  and  to  an  examination  of  the  state  of  the  affairs 
This  scrutiny,  and  a  right  to  insist  upon  a  dissohition  in 
consequence  of  a  breach  of  the  contract,  or  to  urge  their 
claims  when  the  affairs  are  liquidated,  are  more  or  less 
vigorously  exercised.  The  difficulty  of  acting  harmoniously 
with  different  persons,  substituted  in  the  place  of  those 
with  whom  the  original  contract  was  made;  the  distrust 
of  heirs,  who  have  not  the  grounds  of  esteem  and  confi- 
dence which  influenced  the  deceased,  and  the  impossibility 
of  treating  easily  with  minors,  are  some  of  the  reasons 
which  will  not  permit  special  partnerships  to  be  excepted 
from  the  general  rule.  It  may  be  objected  that  these  rea- 
sons apply  only  in  favor  of  the  general  partners,  and  that 
it  is  for  them  to  judge  as  to  the  continuation  of  the  busi- 
ness with  the  heirs.  But  the  heirs  of  the  deceased  ought  to 
enjoy  the  same  privilege.  Reciprocal  rights  ought  to  re- 
sult from  a  mutual  agreement.  There  is  no  solid  reason 
why  the  special  partnership  should  not  be  dissolved  by  the 
death  of  one  of  the  partners,  except  when  the  capital  is 
divided  into  transmissible  shares,  in  which  case  the  asso- 
ciates having  consented  that  each  may  substitute  another 
in  his  place,  as  he  may  desire,  without  the  authority  of  the 
others,  it  is  natural  to  conclude  that  the  heirs  of  a  deceased 
member  fill  his  place  in  the  same  manner  as  if  he  had  as- 
signed his  share.  I  have  given  the  substance  of  the  reason- 
ing of  Pardessus,  and  the  result  he  attains  has  not  only 
the  authority  of  M.  Troplong  in  its  favor,  but  also  that  of 
other  commentators  (M.  M.  Malpeyre,  ct  Jourdain,  No. 
474;  M.  Persil,  fils.,  p.  344),  while  it  does  not  appear  to 
have  been  questioned  or  doubted. 

It  thus  appears,  that  in  the  jurisprudence  of  that  na- 
tion whence  the  peculiar  contract  of  a  special  partnership 
has  been  adopted  by  us  and  grafted  into  our  law, — where 
the  system  has  long  existed,  is  familiarly  known,  and  its 
nature,  qualities,  and  practical  relations  to  various  events 
and  circumstances,  have  been  well  considered  under  the 
light  of  no  brief  experience — the  eft'ect  of  the  death  of  the 


AMES  f.  DOWNING  429 

Special  partner  is  to  dissolve  the  firm.  This  agrees  with 
the  conclusion  I  had  attained  upon  independent  reasoning, 
before  consulting  these  authorities,  and  I  am  consequently 
led  to  pronounce  the  firm  in  which  the  testator  was  a  spe- 
cial partner,  dissolved  at  his  death;  and  to  hold  the  ex- 
ecutor, who  was  his  general  partner,  responsible  for  the 
testator's  interest  in  the  firm  at  that  time,  upon  a  liquida- 
tion of  the  affairs  as  if  made  then.- 


'  Compare:  The  interesting  discussion  of  the  origin  of  limited 
partnerships  by  Justice  Hoffman  in  Jacquin  v.  Buisson,  ii  How.  N.  Y. 
Pr.  385,  1855.  See  also  Coope  v.  Eyre,  i  H.  Bk.  2>7'  1/88,  at  p.  48; 
McArthur  v.  Chase,  13  Gattan  (Va.)  683,  1857.  Moorhead  v.  Seymour, 
•j-j  N.  Y.  Supp.  1050,  1901.  at  p.  1054. 

The  position  of  the  learned  Surrogate  that  on  the  Continent  of 
Europe  the  death  of  a  special  partner  [The  cominanditaire  of  the 
Societe  en  commandite  simple,  i.  c.,  formed  intuitu  personal,  dis- 
solves the  firm,  is  combatted  by  Isidore  Alauzet,  in  his  Commcntaire 
du  Code  de  Commerce,  1856,  to»i  i,  p.  301  : 

"The  death  of  a  partner  carries  with  it  the  dissolution  of  the  part- 
nership. This  event  changes  the  conditions  of  the  contract;  it  was 
not  a  simple  community  of  things  that  the  deceased  partner  had 
founded,  but  an  association  of  persons;  and  it  is  very  natural  that  the 
association  cannot  continue,  at  least  ipso  facto,  either  between  the 
surviving  members  of  the  partnership  or  between  the  survivors  and 
heirs  of  the  deceased  partner.  This  rule  does  not  cause  any  difficulty 
in  ordinary  partnerships.  One  may  doubt  if  it  is  applicable  to  limited 
partnerships,  when  a  special  partner  dies,  and  may  ask  if  this  event 
draws  with  it  also,  ipso  facto,  the  dissolution  of  the  partnership?  or 
if  such  dissolution  is  denied,  whether  it  gives  to  the  heirs  of  the 
special  partner  or  to  the  surviving  general  partners,  or  to  both,  the 
right  of  insisting  on  a  dissolution?  or,  finally,  one  may  ask  if  the 
rules  established  for  limited  partnerships  apply  to  limited  partner- 
ships in  which  the  capital  is  divided  into  shares  of  stock?  If  the 
capital  of  the  limited  partnership  is  divided  into  shares  the  general 
opinion  is  that  the  decease  of  a  special  partner  cannot  be  a  cause  of 
dissolution.  'The  partners.'  says  M.  Pardessus.  'having  joined  the  part- 
nership on  the  assurance  that  each  of  them  can  substitute  for  him- 
self whomsoever  he  will  without  the  authorization  of  the  others,  it 
is  natural  to  conclude  that  the  heirs  of  the  partner  should  replace 
hirn  ipso  facto  in  the  same  manner  as  if  he  had  made  the  heirs 
assignees  of  his  stock.' 

"Legal  opinion,  let  us  say  at  once,  undertakes  to  establish  differ- 
ent rules  depending  on  whether  the  capital  of  the  limited  partnership 
is  or  is  not  divided  into  shares  of  stock. 

_  "Article  58  of  the  Code  of  Commerce,  in  permitting  the  capital  of 
a  limited  partnership  to  be  divided  into  shares,  says  in  express  terms 
that  this  circumstance  does  not  carry  with  it  any  other  modification  of 
the  rules  established  for  this  kind  of  partnership.  The  Code  Napoleon 
cannot  be  cited  as  specifically  regulating  matters  concerning  limited 
partnerships,  with  which  it  docs  not  concern  itself.  M.  Pardessus 
solely  supports  his  argument  by  the  presumed  consent  of  the  man- 
aging partners  that  each  special  partner  [where  the  capital  is  divided 
into  shares]  can  substitute  for  himself  an  assignee.  If  in  the  case  of 
the  decease  [of  a  special  partner  where  the  capital  is  not  divided  into 


430  LIMITED  PARTNERSHIP 

shares]  the  partners  make  a  formal  declaration  to  the  effect  that  they 
accept  the  heirs  in  place  of  the  deceased,  is  not  the  reason  for  permit- 
ting them  to  do  so  the  same,  and  better  established?  Why,  then,  decide 
otherwise  in  this  case?  It  is  possible  that  the  partnership  articles  may 
contain  a  stipulation  to  this  efifect,  and  give  to  the  special  partner  the 
right  of  substituting  for  himself  whom  he  will,  as  M.  Pardessus 
says :  How  admit  in  that  case  the  dissolution  ipso  facto  by  the  de- 
cease of  the  special  partner?  M.  Pardessus  agrees  that  the  better 
reasons,  which  he  has  set  forth  with  his  habitual  logic,  militate  in  favor 
of  the  theory  contrary  to  his  own  (namely,  that  the  death  of  a  special 
partner,  where  the  capital  is  not  divided  into  shares,  dissolves  the 
partnership)  ;  but  he  contends  that  the  same  rights  should  belong  to 
the  special  partners  as  to  the  general  partners,  on  the  ground  that 
'there  cannot  be  rights,  resulting  from  the  nature  of  a  reciprocal  act 
which  are  not  mutual.' 

"To  admit  this  reason  as  peremptory  it  is  necessary  at  least  that 
the  obligation  imposed  on  the  two  parties  shall  be  equal.  Under  such 
conditions  their  rights  cannot  be  different.  In  the  limited  partnership 
contract  what  obligations  does  the  special  partner  leave  to  his  heirs?  He 
is  only  a  partner  as  to  the  fund  which  he  has  invested  in  the  business, 
not  for  his  person.  If  the  law  reserves  rights  for  him  it  is  solely  in 
his  interest,  but  it  does  not  impose  any  duty  upon  him.  However,  we 
do  not  demand  anything  better  than  to  submit  ourselves  to  the  rule  of 
'mutuality  in  contracts'  invoked  by  M.  Pardessus.  The  limited  part- 
nership being  completely  outside  the  scope  of  the  Code  Napoleon,  we 
cannot  apply  its  provisions  to  them,  but  the  death  of  a  special  partner 
can,  like  other  causes  left  to  the  decisions  of  the  Court,  authorize  either 
the  general  partners  or  the  heirs  of  the  special  partner  to  demand  the 
dissolution  of  the  partnership,  supposing  it  to  be  possible  that  the 
general  partners  could  act  for  their  own  interest  rather  than  for  the 
interest  of  the  partnership.    This  makes  the  rights  of  all  parties  equal. 

"We  should  add,  that  M.  Pardessus  in  the  case,  not  of  the  decease, 
but  of  the  insolvency  of  the  special  partner,  goes  even  further  than 
ourselves.  He  accords  to  the  general  partners  alone  the  right  to  choose 
between  the  continuation  or  the  dissolution  of  the  partnership. 

"The  death  of  the  general  partner,  even  in  the  case  where  the  capital 
of  the  partnership  is  divided  into  shares,  should  draw  with  it,  ipso  facto, 
the  dissolution  of  the  partnership. 

"We  should  not  ignore  the  fact  that  most  authors,  when  the  capital 
of  the  limited  partnership  is  not  divided  into  shares,  teach  that  the 
decease  of  the  special  partner  is  the  cause  of  dissolution.  It  will, 
therefore,  be  prudent  for  the  general  partners  to  stipulate  in  the  articles, 
if  they  consider  it  proper,  that  the  partnership  shall  continue  with  the 
heirs,  there  being  nothing  to  place  the  least  obstacle  to  such  an 
agreement." 

The  part  of  the  Code  Napoleon  referred  to  in  the  foregoing  extract 
is  Title  ix,  ch.  lo.  This  chapter  deals  with  the  dissolution  of  Societes. 
The  question  in  dispute  is  whether  Societes  includes  Societes  en  coiii- 
inandite  simple,  i.  c..  limited  partnerships  not  having  their  capital  divided 
into  shares  of  stock.  Section  1865  of  the  code  provides  that  the  death  of 
a  partner  dissolves  the  firm,  and  section  t868  provides,  "If  the  partner- 
ship articles  contain  provisions  stipulating  that  the  partners  shall,  in  the 
case  of  the  death  of  one  of  the  partners,  continue  the  partnership  with 
his  heir,  or  that  the  partnership  shall  only  continue  with  the  surviving 
partners,  such  provisions  shall  be  adhered  to.  In  the  later  case  the  heir 
of  the  deceased  partner  is  only  entitled  to  require  a  partition  of  the 
partnership  property  as  it  stood  at  the  time  of  such  death,  and  the 
heir  has  no  share  in  any  rights  which  the  partnership  may  acquire  after 
the  death  of  such  partner,  unless  they  were  a  necessary  consequence  of 


AMES  z:  DOWNING  431 

what  had  been  done  before  the  death  of  the  partner  to  whose  rights  he 
has  stacceeded."     [Trans,  by  Wright,  London,  1908.] 

Modern  French  opinion  seems  to  be  in  favor  of  Pardessus.  See 
Droit  Commercial  par,  Lyon-Caen  ct  Renault,  5th  ed.,  1899,  p.  210,  par. 
352;  French  Commercial  Law  by  Goirand,  2nd  ed.,  1898,  p.  93. 

The  present  German  Commercial  Code,  Art.  177,  provides :  "The 
death  of  a  partner  of  Hmited  liability  does  not  necessitate  the  dissolution 
of  the  partnership."     [Trans,  by  Piatt,  London,  1900.] 


432  LIMITED  PARTNERSHIP 


SINGER  V.  KELLY. 
In  the  Supreme  Court  of  Pennsylvania,  1863. 

44  Pennsylvania  Reports,  145. 

Thompson,  J.^  On  the  15th  of  June,  1856,  a  copartner- 
ship was  formed  for  the  transaction  of  a  general  commission 
business,  in  the  city  of  Philadelphia,  between  William  J. 
Martin,  William  McAllister,  and  Charles  Kelly,  under  the 
firm  name  of  Martin  &  McAllister.  It  was  to  be  a  partner- 
ship under  the  Act  of  Assembly  of  the  2d  of  March,  1836. 
Martin  and  McAllister  were  to  be  the  general  partners,  and 
Kelly  the  special  partner.  The  firm  was  duly  organized,  and 
Kelly  paid  in  $20,000  in  cash,  his  agreed  contribution  to  the 
firm.  The  firm  commenced  business,  but  in  about  six  months 
failed,  sinking  the  entire  sum  contributed  by  the  special 
partner,  and  had  an  unliquidated  indebtedness  of  some 
$78,000,  which  the  assets  were  totally  inadequate  to  satisfy. 

Under  these  circumstances,  the  plaintiff  has  brought 
this  action  against  all  the  partners,  seeking  to  make  the  spe- 
cial partner  liable  on  the  ground  that  the  business  of  the 
firm  was  changed,  and  that  such  change,  without  first  having 
a  new  certificate,  rendered  him  liable. 

The  evidence  of  a  change,  consisted  of  two  distinct  pur- 
chases by  ]\Iartin  &  McAllister:  one  on  the  26th  of  June, 
1857,  of  fifty  bales  of  cotton,  amounting  to  $4,200,  for 
which  they  gave  notes;  and  the  other  four  days  after,  of 
sixty  tierces  of  rice,  at  $2100,  also  on  a  credit  of  four 
months. 

The  learned  judge  of  the  District  Court,  who  tried  the 
case,  was  of  the  opinion  that  there  was  no  proof  of  knowl- 
edge or  assent  by  the  special  partner  to  these  purchases,  out- 
side the  legitimate  scope  of  the  business  of  the  firm.     He 


The  Reporter's  statement  of  the  facts  of  the  case  is  omitted. 


SINGER  V.  KELLY  433 

therefore  reserved  the  point  whether  a  special  partner  could 
be  made  hable  for  a  change  in  the  business  without  a  knowl- 
edge that  it  had  taken  place,  and  directed  a  verdict  for  the 
plaintiff,  subject  to  the  entry  of  judgment  for  the  defendant 
non  obstante  veredicto.  Subsequently,  and  after  argument 
in  bone  in  the  District  Court,  judgment  was  entered  for  the 
defendant  on  the  point  reserved. 

We  have  before  us,  therefore,  the  case,  "pure  and  sim- 
ple," of  an  effort  to  charge  a  special,  as  a  general  partner, 
on  account  of  a  change  in  the  business  of  the  firm,  without 
any  knowledge  whatever  of  a  change  in  the  business  of  the 
firm,  either  in  point  of  fact,  or  as  a  presumption  arising 
from  his  connection  Vv^ith  the  transaction.    Can  this  be  done  ? 

The  section  of  the  act  under  which  this  result  is  claim.ed, 
is  the  1 2th  Section,  and  reads  as  follows:  "Every  alteration 
which  shall  be  made  in  the  names  of  the  partners,  in  the 
nature  of  the  business,  or  in  the  capital  or  shares  thereof,  or 
in  other  matter  specified  in  the  original  certificate,  shall  be 
deemed  a  dissolution  of  the  partnership,  and  any  such  part- 
nership which  shall  in  any  manner  be  carried  on  after  such 
alteration  shall  have  been  made,  shall  be  deemed  a  general 
partnership,  unless  renewed  as  a  special  partnership  accord- 
ing to  the  last  (preceding)  article."' 

The  contest  was  therefore  really  between  intelligent 
action  as  the  ground  of  liability,  on  the  one  hand,  and  a 
claimed  liability  by  force  merely  of  the  words  of  the  statute, 
regardless  of  the  element  of  knowledge  or  assent,  on  the 
other.  Did  the  legislature  mean  this  last  position  to  be  the 
true  interpretation  of  the  clause? 

Unless  it  plainly  appears  that  liability,  without  any  ref- 
erence to  knowledge  or  intentional  violation  of  the  provision  ' 
in  question,  was  meant,  we  should  not  give  it  a  construction 
tending  to  such  penal  consequences  as  is  contended  for.  It 
would  be  contrary  to  natural  justice,  and  such  results  should 
not  be  arrived  at  by  interpretation,  unless  it  be  inevitable. 

It  is  a  maxim,  further,  which  declares  that  no  one  shall 
suffer  for  another's   fault:   "Xcuw  pioiitur  pro  alicno  de- 


434  LOIITED  PARTNERSHIP 

licto."  I  admit  there  are  exceptions  to  the  rule,  however; 
things  mala  prohibita  may  induce  liabihty  sometimes  without 
the  knowledge,  really  of  the  party  ultimately  liable.  In  cases 
of  suretyship,  liability  always  arises  out  of  the  acts  or  omis- 
sions of  the  principal.  But  in  these  cases  the  consequence 
results  from  positive  legislative  regulations  on  the  one  hand, 
and  the  nature  of  the  engagement  on  the  other.  But  neither 
of  these  relations  exist  here.  I  cannot  find  any  warrant, 
under  a  fair  interpretation  of  the  clause  of  the  statute,  for 
holding  that  the  special  partner  is  a  guarantor  for  the  gen- 
eral partners,  further  than  his  deposit  according  to  the  con- 
tract; nor  that  it  is  to  be  construed  as  a  penal  statute.  T 
think  that  an  analysis  of  the  statute  itself  will  show  that 
its  consistency  can  only  be  preserved,  by  holding  the  special 
partner  to  be  involved  alone  by  his  own  acts  or  omissions  of 
violation,  or  by  assenting  to  those  of  his  copartners,  when  he 
knows  or  is  presumed  to  know  them. 

We  have  no  decisions  on  the  precise  point  under  consid- 
eration in  our  own  state,  nor  have  any  been  referred  to  as 
adjudged  in  other  states  where  a  similar  law  exists.  We  must 
therefore  explore  the  meaning  of  this  clause  by  the  light  of 
other  provisions  in  the  statute,  involving  the  same  respon- 
sibility. 

Dissolution  of  the  partnership  is  what,  in  contemplation 
of  the  law,  was  the  first  consequence  to  flow  from  any  of  the 
changes  or  alterations  spoken  of  in  the  section.  But  the 
law  also  contemplates  the  carrying  on  of  the  business  in  an 
associated  and  general  form  of  partnership,  with.out  the 
limitation  provisions,  and  holding  all  liable  as  general  part- 
ners. It  is  the  carrying  on  of  the  business,  after  a  violation 
In  any  of  the  particulars  specified,  which  turns  the  concern 
into  a  general  partnership.  None  of  the  general  partners, 
without  the  knowledge  or  assent  of  the  special  partner,  could 
change  "the  nature  of  the  business,"  so  as  to  render  the 
special  partner  liable;  it  would  be  to  apply  a  more  severe 
rule  than  could  obtain  if  the  violation  consisted  in  a  change 
of  the  firm  name,  or  of  the  capital  or  shares  in  it,  which 


SINGER  V.  KELLY  435 

manifestly  could  not  be  done  without  the  assent  of  all ;  and 
3et  the  consequences  would  be  the  same.  Thus,  there  would 
be  no  distinction  between  intended  relations,  and  those 
neither  intended  nor  known. 

In  many  other  provisions  of  the  statute,  the  conse- 
quences of  violations,  are  fixed  to  the  extent  of  general  liabil- 
ity of  the  special  partner;  but  without  exception,  I  think, 
they  all  imply  the  knowledge  or  assent  of  the  party  to  be 
charged  by  the  acts  done,  to  which  the  consequence  is  at- 
tached. A  false  statement  in  the  original  certificate  has  this 
effect,  and  this  must  be  made  by  all.  So  after  organization, 
transacting  the  business  of  the  firm,  or  acting  as  agent  or 
attorney  for  it,  interfering  in  its  business,  and  perhaps,  for 
reducing  capital,  will  each  render  the  special  partner  liable ; 
but  they  all  imply  volition  with  knowledge  of  the  act. 

The  twentieth  and  twenty-first  sections  of  the  act,  espe- 
cially, exhibit  the  rule  of  practice  evidently  intended  by  the 
legislature.  Assignments  for  certain  purposes,  and  with 
certain  intent,  after  insolvency  or  contemplated  insolvency 
by  the  firm,  or  by  a  partner  under  the  same  circumstances, 
is  forbidden;  and  the  twenty-second  section,  provides  that 
if  any  special  partner  shall  violate  any  of  these  provisions,  or 
assent  to  any  such  violations,  he  shall  be  liable  as  a  general 
partner.  The  ground  of  liability  is  here  plainly  expressed  as 
only  to  ensue  in  consequence  of  a  personal  violation  of  the 
inhibited  act,  or  assenting  to  its  violation  by  copartners. 
I  argue,  therefore,  that  if  the  statute  throughout,  as  I  think 
it  does,  fixes  the  consequences  of  violation  of  its  provisions 
to  be  general  liability,  and  they  necessarily  imply  knowledge 
and  assent,  we  may  fairly  presume  that  the  same  cause 
was  supposed  to  be  necessary  to  produce  the  same  result  in 
the  clause  in  question.  If  the  change  in  the  nature  of  the 
business,  therefore,  by  his  copartners,  was  not  known  by 
the  defendant  Kelly,  and  the  business  was  carried  on  after- 
wards without  his  knowledge  that  it  had  been  so  changed, 
he  would  not  be  liable  in  consequence  thereof. 

It  is  not  intended  to  deny  that  the  requisites  of  the 


436  LIMITED  PARTNERSHIP 

Statute  must  be  strictly  pursued,  in  organizing  and  conduct- 
ing limited  partnerships,  but  this  should  not  change  the  rule 
of  interpretation,  which  requires,  in  public  beneficial  statutes, 
that  construction  which  will  promote  their  objects  rather 
than  destroy  them.  One  of  the  great  objects  of  the  system 
of  limited  partnerships  was  to  encourage  the  employment  of 
capital,  without  personal  activity  on  the  part  of  its  owners, 
by  associating  it  with  industry  and  enterprise,  which  might 
not  be  possessed  of  capital.  But  should  we  hold  that  a 
change  in  the  business,  which  might  be  made  by  the  active 
partners,  without  the  knowledge  or  assent,  either  actual,  or  to 
be  presumed  from  circumstances,  of  the  special  partner,  the 
capitalist,  and  he  be  liable  notwithstanding,  it  would  deter 
all  prudent  men  from  investing  or  embarking  their  capital 
in  any  such  way ;  for  by  the  very  terms  of  the  act  he  is  not 
allowed  to  interfere  with  the  operations  of  the  concern.  Such 
a  construction  would  put  him  completely  within  the  power 
and  at  the  mercy  of  his  copartners.  But  when  we  hold  him 
only  for  his  own  acts  or  assent,  we  place  responsibility  on 
its  true  footing,  the  choice  of  the  party. 

These  views  are  supported  by  the  case  of  The  Madison 
County  Bank  z'.  Gould,  5  Hill,  309.  That  case  arose  on  the 
New  York  statute  regulating  limited  partnerships,  from 
which  ours  was  copied.  I  believe,  verbatim.  It  was  attempted 
in  that  case,  as  in  this,  to  hold  the  special  partner  liable  as  a 
general  partner.  One  ground  was  a  mistake  of  a  month  in 
the  advertisement :  in  setting  forth  the  commencement  of  the 
firm  to  be  in  November  instead  of  October,  The  court  there 
held,  that  as  there  was  no  evidence  of  an  intentional  violation 
of  the  statute  in  the  mispublication,  the  special  partner  was 
not  liable  by  reason  of  it.  Another  ground  claimed  for  lia- 
bility was  the  investment  of  a  large  portion  of  the  capital  in 
the  purchase  of  real  estate,  not  within  the  scope  of  the  busi- 
ness of  the  firm.  The  special  partner's  liability  was  made  to 
turn  on  the  question  of  knoivlcdge  and  assent  to  the  pur- 
chases, although  the  conveyance  was  taken  in  his  name,  as 
well  as  that  of  his  copartners.     Bronson,  J.,  said:  "I  cannot 


SINGER  V.  KELLY  437 

think  him  Hable  for  the  wrong  done  by  his  copartners,  with- 
out showing  that  he  participated  in  the  act."  In  the  same 
spirit  is  Bowen  v.  Argall,  24  Wend.  497.  We  are  of  opinion, 
therefore,  that  there  was  no  error  in  the  riiHng  of  this  point 
in  the  court  below. 

We  see  nothing  in  the  other  specifications  of  error  re- 
quiring special  notice.  W&  agree  with  the  court  below,  that 
we  see  no  reason  for  holding  that  the  special  partner  had 
anything  to  do  with  the  care  and  collection  of  the  debts  of  tl:e 
firm,  after  it  failed.  If  he  was  not  involved  as  a  general 
partner,  he  had  no  concern  in  it.  His  money  was  in  it,  and 
applicable  to  the  debts,  and  that  was  the  only  extent  of  his 
connection  with  it. 

There  was  no  offer  to  show  that  Kelly  assented  to  any 
assignment  of  assets,  so  as  to  render  him  liable  on  that  score, 
and  the  court  properly  rejected  the  naked  offer  to  prove  that 
the  general  partners  made  some  such  assignments. 

Judgment  affirmed. - 


'^Compare:  Taylor  v.  Rasch.  Fed.  Cas.  13,  800,  1874.  (A,  B  and  C 
formed  a  limited  partnership,  C  being  the  special  partner.  The  articles  set 
forth  that  the  nature  of  the  business  to  be  transacted  was  the  purchase, 
sale  and  manufacture  of  furniture.  A  and  B,  without  the  knowledge 
of  C.  contracted  a  debt  in  the  firm  name  for  the  purchase  of  clothing 
for  themselves.  Held,  that  the  debt  was  not  an  obligation  of  the  part- 
nership. Longyear.  J. :  "Therefore,  conceding  that  the  arrangement  in 
question  was  made  with  the  general  partners,  as  claimed  in  the  answer, 
if  it  was  not  within  the  scope  and  purposes  of  the  partnership,  it  was 
wholly  unauthorized,  and  therefore  void.") 


438  LIMITED  PARTNERSHIP 


SHERWOOD  V.  HIS  CREDITORS. 
In  the  Supreme  Court  of  Louisiana,  1890. 

42  Louisiana  Annual  Reports,  103. 

Poche,  J.  This  appeal  involves  the  discussion  of  the 
validity  of  a  pledge  granted  by  the  insolvent  to  Francis  Mar- 
tin, his  partner  Ui  comincndam,  on  all  of  the  insolvent's  share 
in  the  partnership  property,  to  secure  an  indebtedness  of 
$5,000. 

The  contest  between  the  partner  in  conimendam,  as  a 
creditor  of  the  insolvent  individually  and  the  creditors  of 
the  partnership. 

The  partner  in  commendam  prosecutes  this  appeal  from 
a  judgment  which  refused  to  recognize  and  enforce  his  rights 
of  pledge. 

The  pertinent  facts  are  as  follows :  A  pre-existing  part- 
nership, carrying  on  the  business  of  manufacturing  doors, 
blinds,  sash,  etc.,  under  the  style  and  name  of  the  "Enterprise 
Sash,  Door  and  Blind  Factory,"  and  composed  of  Alexander 
Smith,  Francis  Martin  and  Philip  W.  Sherwood,  was  dis- 
solved in  the  early  part  of  November,  1887,  and  Sherwood 
bought  out  Smith's  interest  in  the  concern  for  $5,000  cash, 
which  he  paid  with  money  loaned  him  by  Martin. 

Immediately  thereafter,  Sherwood  executed  an  act  of 
pledge  of  his  two-third  interest  in  the  factory  in  favor  of 
Martin  to  secure  his  indebtedness  of  $5,000  to  the  latter. 

On  the  same  day  the  two  entered  into  a  copartnership 
under  an  authentic  act,  with  Martin  as  a  partner  in  commen- 
dam, to  continue  the  same  kind  of  business  under  the  same 
style  and  name  as  heretofore.  In  the  new  business  Sher- 
wood contributed  his  undivided  two-third  interest  in,  and 
Martin  his  third  of,  the  factor}',  with  a  stipulation  of  equal 
shares  in  profits  and  losses,  limiting  Martin's  losses  to  his 
contrilnition. 


I 


SHERWOOD  z:   HIS   CREDITORS  439 

On  the  19th  of  April,  1888,  Sherwood  made  a  surrender 
of  the  partnership  assets,  and  a  syndic  was  appointed  on 
June  5,  1888. 

]\Iartin's  claim,  under  its  terms  and  in  accordance  with 
the  act  of  pledge,  having  matured,  he  obtained  an  ex  parte 
order  on  June  12,  1888,  for  the  sale  of  Sherwood's  interest 
in  the  concern,  which  had  been  pledged  to  him. 

Before  a  sale  could  be  effected  his  proceeding  was  en- 
joined by  the  syndic  on  numerous  grounds,  one  of  which 
was  that,  as  ]\Iartin  was  a  partner,  his  pledge  was  of  no  effect 
toward  the  creditors  of  the  partnership. 

The  syndic  having  thereafter  proceeded  to  a  sale  of  all 
the  assets  of  the  concern,  he  presented  an  account  on  which 
he  placed  Martin  as  an  ordinary  creditor  only. 

By  way  of  opposition  Martin  urged  his  rights  of  pledge 
on  the  proceeds  of  two-thirds  of  the  partnership  assets. 
Whereupon  Shakspeare,  Smith  &  Co.,  creditors  of  the  part- 
nership, opposed  ^Martin's  right  of  being  considered  as  a 
creditor  of  the  partnership  at  all,  on  the  ground  that  he 
was  only  a  creditor  of  Sherwood  individually. 

The  various  oppositions  and  the  injunction  proceedings 
were  consolidated  and  tried  together,  resulting  in  judgment 
by  which  the  syndic's  injunction  was  perpetuated,  IMartin's 
pledge  was  denied  and  rejected,  in  so  far  as  it  could  affect 
the  rights  of  the  creditors  of  the  partnership,  his  opposition 
dismissed,  and  the  opposition  of  Shakspeare,  Smith  &  Co. 
maintained. 

From  the  foregoing  statement  of  facts,  tested  under 
wxll  settled  principles  of  law  and  of  jurisprudence,  it  is  ap- 
parent that  the  judgment  thus  rendered  is  correct  in  every 
particular. 

The  fallacy  of  appellant's  contention  consists  in  his 
assuming  the  attitude  of  a  third  party  or  of  a  stranger,  in 
dealing  with  the  insolvency  proceedings  of  Philip  W.  Sher- 
wood, for  the  purpose  of  winding  up  the  business  of  the 
concern  known  as  the  "Enterprise  Sash,  Door  and  Blind 
Factorv." 


440  LIMITED  PARTNERSHIP 

It  is  elementary  in  commercial  law,  as  well  as  under 
the  provisions  of  the  Civil  Code,  that  "the  partnership 
property  is  liable  to  the  creditors  of  the  partnership  in  prefer- 
ence to  those  of  the  individual  partner."  *  *  *  j^^^ 
2823. 

And  for  such  purposes,  the  partner  m  coniuicndam  is 
in  no  better  position  than  an  active  partner.  As  a  member 
of  an  insolvent  partnership  his  only  immunity  consists  in 
the  restriction  of  his  liability  for  the  debts  of  the  concern, 
to  the  amount  which  he  had  agreed  to  furnish  by  his  con- 
tract.    C.  C.  2842. 

A  partnership  with  a  partner  in  commcndain  may  exist 
in  every  association  known  as  partnerships,  and  it  can  not 
be  treated  as  a  separate  division  of  partnerships.  C.  C. 
2840. 

Ulman  &  Co.  v.  Briggs  ct  al.,  32  An.  660;  Marshall  v. 
Lambette,  7  Rob.  471. 

Hence  it  follows  that  in  determining  the  rights  of  Alar- 
tin  in  and  to  the  partnership  assets  as  a  creditor  of  Sher- 
wood, he  must  be  treated  with  the  same  measure  which 
would  be  meted  out  to  a  simple  commercial  partner  whose 
share  in  the  concern  is  liable  for  partnership  debts,  and 
whose  claims  as  a  creditor  of  his  partner  must  be  subordi- 
nated to  the  claims  of  creditors  of  the  partnership.  Guer- 
inger  v.  Creditors,  33  An.  1279. 

As  soon  as  the  partnership  between  Sherwood  and  Mar- 
tin was  formed,  their  respective  previous  and  individual  in- 
terests or  shares  in  the  factory  were  vested  in  the  ideal  being 
known  as  the  partnership,  and  no  portion  thereof  could  again 
become  the  property  of  the  partners,  but  the  residuum,  after 
the  payment  of  the  partnership  debts.  39  An.  362,  Succes- 
sion of  Pilcher. 

Hence  the  District  Judge  was  correct,  not  only  in  hold- 
ing that  the  pledge  set  up  by  Alartin  on  the  previous  interest 
or  share  of  Sherwood  in  the  concern  could  not  be  enforced 
to  the  detriment  of  the  creditors  of  the  partnership,  but  that, 
as  he  was  only  a  creditor  of  Sherwood,  he  had  as  such  no 


SHER\^'OOD  z:   HIS   CREDITORS  441 

right  to  participate  in  the  distribution  of  the  proceeds  of  the 
partnership  assets.  His  only  recourse  is  on  the  rcsiduiiifi 
which  might  accrue  to  his  debtor  after  the  full  liquidation  of 
the  partnership. 

As  he  had  no  pledge  which  he  could  enforce  adversely 
to  the  creditors  of  the  concern,  it  follows  that  he  had  no 
legal  right  to  wrench  the  property  from  the  possession  of 
the  syndic  for  the  purpose  of  effecting  a  sale  of  the  same 
independently  of  the  insolvency  proceedings.  Hence  the 
injunction  sued  out  to  stay  his  proceeding,  was  properly 
perpetuated. 

Judgment  affirmed.^ 


'  White  V.  Hackctt,  20  X.  Y.  178,  1859.  (The  statute  provided  that 
in  case  of  the  insolvency  or  bankruptcy  of  the  partnership,  no  special 
partner  "shall  under  any  circumstances"  be  allowed  to  claim  as  a 
creditor  until  the  claims  of  all  other  creditors  of  the  partnership  shall 
be  satisfied.  A  was  a  special  partner.  Besides  his  contribution  he  had 
made  loans  to  the  firm.  Held,  that  as  to  these  loans  A.  was  a  postponed 
creditor.    Accord:  Dunning's  App.,  44  Pa.  150,  1863). 

Clapp  V.  Lacey,  35  Conn.  463.  1863.  (The  statute  provided  that  "All 
advancements  to  the  capital  stock  by  the  special  partners  shall  be  made 
in  cash  *  *  *  ^^d  no  part  of  the  capital  furnished  by  such  partner 
shall  be  withdrawn  *  *  *  nor  shall  any  special  partner  under  any 
circumstances  be  considered  a  creditor  or  allowed  to  claim  as  creditor 
in  case  of  the  insolvency  or  bankruptcy  of  the  partnership."  Held,  a 
special  partner  making  a  loan  to  his  firm  above  his  contribution  was.  as 
to  that  loan,  a  creditor.  The  Court,  in  its  opinion,  lays  emphasis  on  the 
fact  that  the  sentence  in  which  the  prohibition  occurs  starts  out  to  deal 
with  "advances  to  the  capital  stock.") 

Jaffe  V.  Krum,  88  ]Mo.  669,  1886.  (Held,  as  dicta,  that  in  the  absence 
of  a  statutory  provision  that  a  special  partner,  loaning  money  to  his 
firm  above  his  contribution,  was  a  postponed  creditor  as  to  such  loan.) 


442  LIMITED  PARTNERSHIP 


HAGGERTY  v.  FOSTER. 

In  the   Supreme  Judicial   Court  of   ]\Iassachusetts, 

1869. 

103  Massachiiseifs  Reports,  17. 

Colt_,  J.^  Upon  the  agreed  statement  of  facts,  the  de- 
fendant Foster  must  be  held  hable  as  a  general  partner  in  the 
firm  of  Barnes  &  Carpenter.  In  the  formation  of  the  special 
partnership  under  the  statute,  there  was  a  failure  to  comply 
with  one  requisition  which  is  made  necessary  in  order  to 
secure  exemption  from  such  liability. 

By  the  Gen.  Sts.  c.  55,  §§  2-4,  the  special  partner  is  re- 
quired to  contribute  to  the  common  stock  a  specific  sum  in 
actual  cash  payment  as  capital ;  all  the  partners  must  make 
and  severally  sign  a  certificate,  which  shall  contain,  among 
other  things,  the  amount  of  the  capital  stock  which  each 
special  partner  has  contributed ;  and  if  a  false  statement  is 
made,  all  the  persons  interested  in  the  partnership  shall  be 
liable  as  general  partners  for  all  the  engagements  thereof. 

It  is  unnecessary  to  consider  all  the  modes  in  which 
Foster  attempted  to  complete  his  contribution  as  special  part- 
ner. His  liability  as  general  partner  is  fixed,  if  within  the 
true  construction  of  the  statute  any  one  of  the  methods 
adopted  is  not  to  be  regarded  as  an  actual  cash  payment  of 
any  part  of  the  amount.  It  is  wholly  immaterial  that  the 
transaction  at  the  time  was  honestly  intended  and  under- 
stood by  the  parties  to  be  sufficient;  that  the  securities 
actually  transferred  afforded  the  means  by  which  their  cash 
value  was  in  fact  subsequently  realized ;  or  that  creditors 
were  not  actually  defrauded.  The  statute  is  plain  and  ex- 
plicit. It  requires  payment  to  be  made  when  a  certificate  is 
signed,  acknowledged  and  recorded  as  the  foundation  of  the 


^  The  Reporter's  statement  of  the  facts  is  omitted. 


HAGGERTY  z:   FOSTER  443 

partnership;  and  this  certificate  must  recite  what  has  been 
done,  not  that  which  is  executory.  Its  object  is  to  provide  a 
fund,  on  the  day  the  company  is  formed,  to  be  thereafter 
subject  to  no  contingencies  or  losses,  except  those  which 
come  from  the  proper  business  of  the  partnership.  The  use 
of  the  phrase  "actual  cash  payment,"  is  emphatic  and  signifi- 
cant. It  is  wisely  intended  to  exclude  a  construction,  by 
which  commercial  securities,  of  any  description  short  of 
cash,  may  be  regarded,  by  the  aid  of  mercantile  usage  or 
otherwise,  as  substantially  equivalent  to  cash ;  and  to  remove 
from  all  parties  the  temptation  to  evade  its  requirements  in 
this  respect. 

In  the  cases  at  bar,  it  appears  that,  on  the  day  when  the 
articles  of  copartnership  were  entered  into,  the  Attleborough 
Bank  had  in  its  custody  two  obligations  of  the  United 
States  for  one  thousand  dollars  each,  payable  to  bearer, 
which  belonged  to  the  defendant  Foster  and  were  deliverable 
to  him  or  his  order  on  demand,  and  which  he  authorized 
Carpenter,  dealing  with  him  as  a  member  of  the  proposed 
firm,  to  take,  sell  and  apply,  as  a  part  of  his  contribution, 
to  the  capital.  These  obligations  were  worth,  at  the  time, 
somewhat  more  than  their  par  value,  and  were  in  fact  taken 
and  sold  by  Carpenter  some  time  in  the  month  of  Septem- 
ber following,  and  applied  to  the  use  of  the  firm  as  it  had 
occasion  for  the  money.  Assuming  that  the  authority  given 
to  Carpenter  to  make  this  appropriation  was  sufficient,  yet  it 
does  not  appear  that  any  action  was  taken  under  it  by  Car- 
penter, or  any  notice  of  the  transaction  given  to  the  bailee  of 
these  securities,  before  they  were  finally  taken  and  sold  by 
him. 

A  majority  of  the  court  are  unable  to  regard  this  as  a 
compliance  with  a  provision,  which  demands  an  actual  cash 
payment,  and  requires  it  to  be  certified,  acknowledged  and 
recorded,  before  the  partnership  is  formed.  These  securi- 
ties were  at  best  but  the  agreement  of  a  third  party  to  pay 
money  at  a  future  day ;  they  cannot  be  treated  as  cash ;  they 
were  not  so  treated  by  the  bank,  in  whose  safekeeping  they 


444  LIMITED  PARTXERSHIP 

were  placed,  and  which  held  them  as  a  special  deposit;  nor 
were  they  so  regarded  by  the  parties  themselves,  who  ex- 
pressly provided  for  their  future  sale  and  conversion  into 
money.  If  considered  as  equivalent  to  cash,  yet  there  was 
no  delivery  of  them  valid  as  against  the  individual  creditors 
of  Foster,  who  for  some  considerable  time  afterwards  held 
the  legal  title  to  them.  Pierce  v.  Bryant,  5  Allen.  91. 
Foqiict  V.  Hoadlcy,  3  Conn.  534. 

It  is  not  necessary  to  consider  the  manner  in  which  the 
remaining  part  of  Foster's  contribution  was  made.  It  is 
sufficient  that  the  certificate,  to  the  extent  indicated,  con- 
tained a  statement,  which,  though  made  in  good  faith  by 
him,  was  a  false  statement  within  the  meaning  of  the  law. 
The  statute  cannot  be  construed  so  as  to  meet  the  hardships 
of  individual  cases.  And  judgment  must  be  rendered  against 
Foster,  according  to  the  agreement  of  the  parties  in  both 
cases. 

Judgment  for  the  plaintiffs.- 


-  Compare:  HoUiday  v.  Union  Bag  &  Paper  Co..  3  Colo.  342.  1877. 
(The  statute  permitted  the  contribution  of  the  special  partner  to  be 
paid  in  propertj-,  but  required  that  when  paid  in  property  it  should  be  so 
stated  and  its  cash  value  given.  The  certificate  stated  that  cash  had  been 
contributed  by  A,  when  as  a  matter  of  fact  the  contribution  was  in 
groceries  and  promissory  notes.  Held,  that  A  was  liable  as  a  general 
partner.) 

Wilson  V.  Bean.  Z2>  HI-  App.  529.  18S9.  (The  statute  permitted  the 
contribution  of  a  special  partner  to  be  made  in  goods.  A  firm  was 
indebted  to  B.  He  cancelled  the  indebtedness  on  an  agreement  which 
was  carried  out  that  he  should  become  a  special  partner  to  the  amount 
of  his  debt.  In  the  certificate  he  stated  that  he  had  contributed  mer- 
chandise to  the  amount  of  the  cancelled  debt.  Held,  that  the  certificate 
was  misleading  and  that  B  was  liable  as  a  general  partner. 

Chick  V.  Robinson.  95  Fed.  619,  1899.  (A  contribution  of  a  certified 
check  is  a  cash  contribution.) 


FOURTH  STREET  NATIONAL  BANK  :■.  WHITAKER  445 


FOURTH  STREET  NATIONAL  BANK  v. 
WHITAKER. 

In  the  Supreme  Court  of  Pennsylvania,  1895. 

170  Pennsylvania  Reports,  297. 

Assumpsit   on  a  promisson^  note  given  by  a  limited 
partnership,  formed  under  the  Act  of  !March  21,  1836.-^ 
Mr.    Justice    Dean.     On    the    31st    of    December, 

1 89 1,  Granville  B.  Haines,  Richard  Wood,  Samuel  B. 
Brown,  Richard  W.  Bacon  and  William  Whitaker,  of 
Philadelphia,  by  the  name  of  Haines  &  Company,  formed 
a  limited  partnership,  under  the  act  of  1836,  for  car- 
rying on  a  wholesale  and  retail  dry  goods  business ; 
the  term  of  the  partnership  was  one  year;  Richard 
W.  Bacon  and  W^illiam  Whitaker  were  special  partners,  the 
others  general ;  the  special  contribution  of  capital  by  each 
of  tlie  special  partners.  Bacon  and  Whitaker,  was  $100,000; 
$50,000  each  in  cash,  and  a  like  sum  in  merchandise,  their 
entire  contribution  as  special  i)artners  being  $200,000.  The 
articles  of  association  were  subscribed  by  all  the  partners, 
duly  acknowledged  and  recorded  in  the  office  of  the  re- 
corder of  deeds  for  Philadelphia.     At  the  end  of  the  year 

1892.  under  the  provisions  of  the  nth  section  of  the  act  of 
1836,  the  partnership  was  renewed  for  another  year.  That 
section  reads  thus :  "Every  renewal  or  continuance  of  such 
partnership,  beyond  the  time  originally  fixed  for  its  duration, 
shall  be  certified,  acknowledged  and  recorded,  and  an  affi- 
davit of  a  general  partner  be  made  and  filed  and  notice  be 
given  in  the  manner  herein  required  for  its  original  forma- 
tion, and  every  such  partnership  which  shall  be  otherwise 
renewed  or  continued  shall  be  deemed  a  general  partnership." 

In  the  articles  of  renewal  in  this  averment,  referring  to 
their  articles  of  the  year  previous :  "The  amount  of  capital 

'  The  Reporter's  statement  of  the  facts  of  the  case  and  his  notes  of 
the  arguments  of  counsel  are  omitted. 


446  LIMITED  TARTXERSHIP 

contributed  by  each  of  the  said  special  partners  in  the  com- 
mon stock  was  $100,000,  one  half  thereof  being  in  cash, 
and  the  other  half  thereof  being  in  goods  and  merchandise, 
making  the  aggregate  amount  of  capital  contributed  by  them 
$200,000,  as  designated  in  the  said  original  certificate,  and 
the  same  remains  unimpaired  and  undiminished,  as  their 
contribution  to  the  present  renewal  and  continuance  of  the 
said  limited  partnership,  being  in  merchandise,  an  inventory 
and  appraisement  whereof  have  been  filed  in  the  court  of 
common  pleas  No.  3  of  Philadelphia  county." 

On  the  expiration  of  this  renewed  partnership  at  the 
end  of  the  year  1893,  there  was  another  renewal  for  a  year 
with  like  averments  and  certificate  in  the  renewed  articles, 
which  were  also  made  of  record,  as  required  by  the  act.  The 
business  was  carried  on,  under  this  last  renewal,  until  the 
26th  of  March,  1894,  when  a  general  assignment  for  the 
benefit  of  creditors  was  made  by  the  partnership.  Before 
the  assignment,  the  Fourth  Street  National  Bank,  the 
plaintiff,  became  the  holder,  for  value,  of  six  notes  drawn 
by  the  partnership,  each  in  the  sum  of  $5,000,  payable  to 
the  bank's  order  on  demand,  and  dated  respectively  Febru- 
ary 24,  March  i,  5,  8,  14,  and  21,  1894.  These  not  being 
paid  on  demand,  the  bank  brought  suit  against  all  the 
members  of  the  firm,  as  general  partners.  The  sworn 
statement  of  claim  avers:  i.  That  plaintift*  accepted  the 
notes  on  the  faith  of  the  writing  signed  by  all  the  members 
of  the  partnership,  and  recorded  in  the  office  for  the  re- 
cording of  deeds,  the  30th  of  December,  1893.  2.  That 
said  writing  set  forth  that  the  original  contribution  of  $200,- 
000  in  cash  and  merchandise,  by  the  special  partners,  "re- 
mains unimpaired  and  undiminished  as  their  contribution 
to  the  present  renewal."  3.  That  at  the  time  said  writing 
was  made  and  put  on  record,  the  entire  original  capital  con- 
tributed by  the  special  partners  had  been  consumed  and  lost 
in  the  business,  and  the  partnership  of  Haines  &  Company 
was  insolvent.  4.  That  the  statement,  that  the  same  re- 
mained unimpaired  and  undiminished,  was  false  in  fact. 


FOURTH  STREET  NATIONAL  BANK  r.  WHITAKER  447 

The  plaintiff  therefore  averred  liabiHty  of  each  and  all 
of  the  members  of  the  firm  as  general  partners. 

To  this  the  defendant,  William  Whitaker,  made  affi- 
davit of  defense,  setting  out,  that  on  the  last  renewal  of  the 
partnership,  on  the  30th  of  December,  1893,  ^^'  the' mem- 
bers joined  in  a  petition  to  the  court  of  common  pleas  for 
the  appointment  of  an  appraiser  of  the  assets  of  the  pro- 
posed renewed  partnership,  and  the  appointment  was  made; 
that  the  appraiser  under  oath  reported  he  had  examined 
carefully  and  appraised  the  goods  and  merchandise  of  the 
proposed  partnership,  and  that  these  included  the  original 
contributions  of  Whitaker  and  Bacon,  the  special  partners, 
and  the  value  of  the  same,  as  merchandise,  was  $200,000; 
that  the  partnership  had  other  merchandise,  accounts  and 
cash,  more  than  sufficient  to  pay  its  debts ;  further,  that  tlie 
$200,000  of  merchandise  appraised  as  the  original  contribu- 
tion of  capital  by  the  special  partners  was  set  apart  as  such, 
and  transferred  to  the  new  partnership.  The  defendant 
then  avers  on  this  preliminary  statement  of  facts:  i.  That 
he,  at  the  time  of  the  renewal,  believed  the  statement  and 
affidavit  of  the  appraiser  to  be  true,  and  that  he,  defendant, 
had  done  all  that  was  required  of  him  as  a  special  partner. 
2.  That  he  is  informed  and  believes  the  notes  were  not 
accepted  by  plaintiff  on  the  faith  of  the  statement ;  that  the 
notes  in  suit  are  renewals  of  notes  given  for  partnership 
debts  of  1893,  and  are  but  a  continuation  of  the  evidence  of 
indebtedness  of  the  older  partnership,  before  the  articles 
of  December,  1893,  for  renewal  were  entered  into.  3.  That 
the  notes  sued  on  were  given  without  his  knowledge  or 
consent,  and  plaintiff  knew  when  it  accepted  them  the  gen- 
eral partners  had  no  authority  to  impose  liability  on  him 
except  as  special  partner.  4.  That  he  has  no  personal 
knowledge  as  to  any  misstatements  of  fact  in  the  articles  of 
1893;  that  he  believed  the  statements  of  the  general  part- 
ners and  of  the  appraiser,  whose  duty  it  was  to  know,  to  be 
true.  On  the  record  thus  made  up.  plaintiff  took  a  rule  for 
judgment  for  want  of  a  sufficient  affidavit  of  defense ;  after 


448  LIMITED  PARTXERSHIP 

argument,  the  court  below,  in  a  carefully  considered  opinion, 
made  the  rule  absolute,  and  defendant  appeals. 

The  averment  in  plaintift's  statement  that  when  the  last 
renewal  was  signed  the  entire  capital  stock  of  the  special 
partners  had  been  lost  in  the  business  of  Haines  &  Com- 
pany, and  the  partnership  was  largely  insolvent,  is  not 
denied  in  the  affidavit  of  defense;  it  is  denied  by  defendant 
there  was  any  intentional  misstatement  on  his  part.  It  must, 
therefore,  be  here  taken  as  true,  that  when  all  the  members 
joined  in  the  representation  on  the  public  records  that  the 
$200,000  capital  remained  unimpaired  and  undiminished, 
that  statement  was  untrue  in  fact. 

The  question  then  is,  what  effect,  if  any,  does  an  un- 
intentional misrepresentation  of  this  character  have  on  the 
liability  of  defendant  as  a  member  of  the  partnership?  As 
already  quoted,  the  nth  section  of  the  act  provides  for  the 
attesting  and  recording  of  articles  of  renewal,  and  public 
notice  of  the  same,  under  the  same  formalities  as  are  re- 
quired in  the  original  formation  of  the  partnership.  The 
penalty  of  a  failure  to  comply  wnth  the  directions  of  the  act 
as  to  the  first  organization  is  found  in  the  8th  section,  as 
follows:  "And  if  any  false  statement  be  made  in  such  cer- 
tificate or  affidavit,  all  the  persons  interested  in  such  part- 
nership shall  be  liable  for  all  engagements  thereof,  as  gen- 
eral partners."' 

This  court  held,  in  Haddock  z'.  Grinnell  Co.,  109  Pa. 
2i'y2.  that :  "This  evidently  means  that  the  affidavit  shall 
give  as  full  information  upon  the  renewal  as  upon  the  origi- 
nal formation  of  the  limited  partnership.  A  mere  formal 
affidavit  setting  forth  the  renewal  only,  would  not  give 
creditors  any  valuable  information  as  to  the  condition  of  the 
firm,  and  the  object  of  the  act  was  to  provide  this  notice." 

Andrews  z\  Schott,  10  Pa.  47,  is  to  the  same  efifect, 
although  in  this  last  case  there  had  been  the  introduction  of 
a  new  partner,  and  the  decision  was  rested  on  the  ground 
that  there  was  the  formation  of  a  new  partnership  instead 
of  the  renewal  of  the  old  one.     But  the  point  is  settled  by 


FOURTH  STREET  NATIONAL  BANK  z:  WHITAKER  449, 

a  deliberately  considered  judgment  in  Haddock  z'.  Grinnell 
Co..  supra,  that  the  requirements  of  the  act,  as  to  state- 
ment and  affidavit  for  renewal,  are  as  rigid  as  ^n  those  for 
the  original  formation  of  the  partnership. 

The  object  of  the  act  was  to  open  a  venture  to  capital, 
with  the  protection  or  advantage  of  restricted  liability ;  but 
upon  a  condition,  that  the  public  should  have  full  means  of 
knowledge  as  to  the  amount  and  character  of  the  venture, 
and  thereby  be  enabled  to  form  a  judgment  as  to  how  far 
the  partnership  was  worthy  of  credit. 

Here  the  record  contained  the  joint  representation  to 
the  public,  of  all  the  partners,  in  December,  1893,  that  the 
original  $200,000  remained  unimpaired  and  undiminished, 
when,  through  business  losses  before  that  date,  it  had  in 
large  part  disappeared. 

We  do  not  consider  it  material  that,  as  concerns, this 
defendant,  the  misrepresentation  was  not  intentional ;  that 
concerns  his  ease  of  conscience,  but  it  neither  restricts  his 
liability  nor  affects  the  rights  of  creditors.  The  act  seems 
to  be  carefully  silent  as  to  any  modification  of  the  language 
which  operates  to  inflict  the  penalty.  It  does  not  say,  will- 
fully, knowingly,  intentionally  false  statement,  but  simply, 
"if  any  false  statement  be  made,"  then  all  persons  interested 
shall  be  liable  as  general  partners.  As  to  the  nature  of  such 
a  misstatement  as  this,  it  is  only  necessary  to  recur  to  Had- 
dock z'.  Grinnell  Co.,  supra  : — "When  a  special  partnership  is 
continued  or  renewed  it  must  be  in  the  same  condition,  so 
far  as  the  special  capital  is  concerned,  as  when  it  was  origi- 
nally formed.  Such  capital  must  be  unimpaired ;  it  must  be 
in  such  condition  as  to  be  available  for  creditors,  and  it  is 
the  duty  of  the  general  partner  to  furnish  this  information 
in  his  affidavit.  If  this  duty  is  neglected,  the  partnership  be- 
comes general,  and  the  special  partner  has  no  immunity." 

Clearly,  there  was  a  false  statement  here  of  a  most 
material  fact,  and  although  not  known  to  defendant  when 
he  joined  in  the  subscription  to  the  articles,  he  cannot,  for 
that  reason,   claim  immunity  as  a  special  partner:  it  was 


^iO  LIMITED  PARTNERSHIP 

his  legal  duty  to  know  the  truth  or  falsity  of  statements  sub- 
scribed to  by  him,  and  placed  on  the  public  records,  and 
although  ignorance  of  its  falsity  may  exempt  from  the 
imputation  of  moral  turpitude,  the  statute  does  not  exempt 
him  from  legal  responsibility. 

The  distinction  drawn  by  the  learned  counsel  for  appel- 
lant between  impaired  and  unimpaired  capital  of  business 
partnerships  is  without  weight  in  the  interpretation  of  this 
statute;  the  object  is  to  give  information  to  the  creditor  of 
the  financial  standing  of  the  partnership,  when  it  invites 
business;  its  credit  depends  on  its  ability  to  pay;  its  ability 
to  pay  depends  on  the  value  of  assets  it  can  lawfully  appro- 
priate in  payment;  this  partnership  did  have,  in  December, 
1 89 1,  $200,000  capital  in  money  and  merchandise,  to  which 
the  creditor  of  that  term  could  look  for  payment  of  his 
debts;  but,  in  December,  1893,  the  partnership  was  wholly 
insolvent;  all  its  assets  were  insufficient  to  discharge  its 
indebtedness;  it  had  $200,000  worth  of  merchandise  on 
hand,  which  was  set  aside,  and  called  unimpaired  and  un- 
diminished capital  of  the  special  partner.  But  to  whom 
did  this  merchandise  in  equity  belong?  Certainly  to  those 
who  had  given  credit  on  the  strength  of  it,  and  it  was  under 
a  pledge,  both  legal  and  moral,  to  them  for  their  debts;  all 
that  was  needed  to  enforce  forfeiture  of  the  pledge  was  a 
judgment  ripe  for  execution.  True,  the  mere  physical  pos- 
session of  the  merchandise  was  in  the  partnership,  but  the 
special  partners  could  not  have  withdrawn  from  the  insol- 
vent firm  $200,000  in  cash,  and  have  held  it  against  the 
creditors;  how  could  the  partners,  all  consenting,  lawfully 
put  aside  for  the  same  partners  $200,000  worth  of  mer- 
chandise? Yet  it  was  represented  by  the  statement,  this 
$200,000  was  subject  to  the  claims  of  future  creditors,  as 
if  the  partnership  had  been  then  formed,  and  the  capital  first 
contributed,  when  the  fact  was,  after  having  undergone  the 
perils  of  two  years'  business,  it  was  impaired  to  the  amount 
that  the  debts  of  the  insolvent  firm  exceeded  the  assets. 
Of  this  important  fact  the  statement  contained  no  hint.     As 


FOURTH  STREET  NATIONAL  BANK  v.  WHITAKER  451 

is  said  in  Vanhorn  z'.  Corcoran,  127  Pa.  255,  where  the 
assets  of  a  partnership  largely  indebted  were  turned  over  as 
a  contribution  of  capital  to  a  limited  partnership :  "The 
whole  of  it  in  equity,  was  liable  to  creditors,  and  could  not 
be  withdrawn  from  them  without  fraud,  until  the  last  dollar 
of  the  debts  of  the  jfirm  was  paid.  So  that  instead  of  prop- 
erty, the  defendants  contributed  a  mere  equity,  to  wit,  what- 
ever was  left  of  the  assets  of  the  firm  after  payment  of  its 
debts." 

As  to  the  notes  sued  on  being  given  for  notes  issued 
before  the  filing  of  the  renewal  certificate,  the  evidence  of 
the  old  debt  was  extinguished,  and  a  new  security  given; 
the  general  partners  had  an  implied  right  to  negotiate  for 
extension  of  time  on  matured  notes,  and  give  those  of  the 
new  partnership,  which  last  was  in  possession  of  all  the 
assets  of  the  old. 

It  is  argued  by  appellant,  the  effect  of  sustaining  the 
judgment  of  the  court  below,  here,  will  be  to  discourage  the 
formation  and  renewal  of  limited  partnerships,  because  capi- 
talists could  not  longer  invest  their  money  prudently  in  such 
business  enterprises.  We  have  no  fears  of  such  conse- 
quence ;  for  almost  sixty  years,  limited  partnerships  have 
multiplied  and  prospered  in  this  commonwealth,  under  an 
unbroken  line  of  decisions,  which  have  uniformly  exacted 
strict  adherence  to  all  the  material  requirements  of  the  law ; 
the  credit  of  such  associations  stands  deservedly  high  in 
public  estimation,  because  those  who  trust  them  feel  they 
can  rely  on  the  truthfulness  of  their  public  statements;  this 
confidence  can  only  be  maintained  by  a  rigid  judicial  en- 
forcement of  those  requirements  which  the  legislature 
plainly  deemed  important;  no  prudent  capitalist  will  re- 
frain from  investment  in  such  enterprises,  because  com- 
pelled to  a  strict  observance  of  the  truth  with  regard  to 
material  facts;  no  prudent  creditor  will  trust  them,  if  this 
measure  of  business  honestly  be  not  exacted. 


452  LIMITED  PARTNERSHIP 

We  see  no  error  in  the  judgment,  and  it  is  therefore 
affirmed. - 


-Compare:  Tilgc  v.  Brooks,  124  Pa.  178,  1889.  (The  act  relating  to 
limited  partnerships  provided  that  if  any  false  statement  be  made  in  the 
certificate  or  affidavit  all  the  persons  interested  in  such  partnership 
should  be  liable  as  general  partners.  A,  B  and  C  tried  to  form  a  limited 
partnership,  C  being  the  special  partner.  There  were  irregularities  in 
the  formation  which  were  sufficient  to  make  C  liable  as  a  general  partner 
for  debts  contracted  during  the  term  of  the  partnership.  At  the  end  of 
the  term  stipulated  in  the  articles  C  withdrew  without  notifying  D,  a 
customer  of  the  firm.  A  and  B  continued  the  business,  buying  goods 
from  D.  Held,  that  as  there  never  had  been  a  general  partnership  in 
fact,  D  was  not  liable  for  goods  bought  after  the  expiration  of  the 
term  for  which  the  limited  partnership  had  been  created.  Paxson,  J. : 
"Under  our  statute  no  general  partnership  was  formed ;  it  does  not  say 
that  an  omission  to  comply  with  its  requirements  shall  have  the  effect 
of  creating  a  partnership  not  intended  by  the  parties,"  p.  182.  See 
contra.  Haviland  v.  Chace,  39  Barb.  N.  Y.  Sup.  Ct.  283,  i860.) 

Fifth  Ave.  Bank  v.  Colgate.  120  N.  Y.  381,  1890.  (The  statute 
relating  to  limited  partnerships  did  not  require  the  renewal  certificate 
to  state  that  the  capital  was  unimpaired.  A,  B  and  C  were  partners,  C 
being  a  special  partner.  The  renewal  certificate  stated  that  the  capital 
was  unimpaired.  This  was  false.  Held,  that  this  false  statement  did 
not  make  C  liable  as  a  general  partner.) 

Hogan  v.  Hadssits,  113  Mich.  568,  1897.  (A,  B  and  C  formed  a 
special  partnership,  C  being  the  special  partner  and  contributing  $10,000. 
At  the  expiration  of  the  term,  the  partnership  was  renewed  and  the 
renewal  certificate  stated  that  C  had  contributed  $10,000  in  cash.  At  the 
time  of  the  renewal  the  $10,000  contributed  by  C  was  not  in  the  form  of 
cash.  Held,  that  the  renewal  certificate  complied  with  the  act,  which 
did  not  require  that  the  character  of  the  capital  at  the  time  of  the 
renewal  be  set  forth.  Hoddack  v.  Grumell  Manuf.  Co.,  109  Pa.  382,  1885, 
cited  in  our  principal  case,  referred  to  and  adversely  commented  on. 
See  p.  574.) 


CHAPTER    VIII 


ELEMENTS   OF   DIFFERENT   FORMS   OF 
ASSOCIATION. 


THOMAS  V.  DAKIN. 

WARNER  V.  BEERS. 

In  the  Supreme  Court  of  Judicature,  and  the  Court 
FOR  the  Correction  of  Errors,  New  York,  1839,  1840. 

22  Wendell's  Reports,  2,  and  23   Wendell's  Reports,  103.' 

Chief  Justice  Nelson  :  This  is  an  action  brought  by 
the  plaintiff,  as  president  of  the  Bank  of  Central  New 
York,  an  association  formed  under  what  is  familiarly  known 
as  the  General  Banking  Law,  passed  April  18,  1838,  to  re- 
cover several  demands  due  the  institution. 

The  defendant  has  demurred  to  the  declaration,  and 
urges  the  unconstitutionality  of  the  law  by  way  of  defence; 
and  it  is  insisted,  in  his  behalf:  i.  That  the  associations 
formed  under  this  law  are  corporations;  and  2.  That  a  gen- 
eral law  authorizing  the  creation  of  these  bodies,  is  incon- 
sistent with  the  ninth  section  of  the  seventh  article  of  the 
constitution  [which  prohibited  the  creation  of  bodies  politic 

^  The  case  of  Thomas  v.  Dakin  was  decided  in  the  Supreme  Co«i^ 
in  the  Octo])er  Term,  1839.  During  the  session  of  the  Legislature  in  the 
winter  of  1840,  the  Court  for  the  Correction  of  Errors  heard  two  cases 
argued  which  had  been  brought  up  by  writ  of  error  from  the  Supreme 
Court,  presenting  the  same  questions  which  arose  in  Thomas  v.  Dakin, 
and  the  decision  of  which  was  1)ascd  upon  the  opinions  dehvercd  in  that 
cause.  These  cases  are  reported  under  the  name  of  Warner  v.  Beers. 
The  editors  have  selected  for  reprinting  those  portions  of  the  opinions  of 
Chief  Justice  Nelson  in  the  Supreme  Court  and  Senator  Verplanck  in 
the  Court  for  the  Correction  of  Errors,  which  relate  to  the  question 
whether  an  association  organized  under  the  Act  of  April  i8th,  1838,  was 
a  "body  corporate."  The  other  opinions,  and  the  Reporter's  statements 
of  the  pleadings  in  tlie  cases  arc  omitted  l)ecause  of  their  great  length. 

(453) 


454  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

and  cori)orate,  unless  with  the  assent  of  two-thirds  of  the 
members  elected  to  each  branch  of  the  legislature].  On 
the  part  of  the  plaintiffs,  it  is  urged  in  reply:  i.  That 
the  associations  are  not  corporations;  2.  That  if  they 
be,  the  act  authorizing  them  may  be  passed  by  a  majority 
bill;  and  3.  If  within  the  ninth  section,  still  the  law  may  be 
passed  by  two-thirds  of  the  members  elected. 

Are  these  associations  corporations?  In  order  to  de- 
termine this  question,  we  must  first  ascertain  the  properties 
essential  to  constitute  a  corporate  body,  and  compare  them 
with  those  conferred  upon  the  associations;  for  if  they  ex- 
ist in  common,  or  substantially  correspond,  the  answer  will 
be  in  the  affirmative.  A  corporate  body  is  known  to  the 
law  by  the  powers  and  faculties  bestowed  upon  it,  expressly 
or  impliedly,  by  the  charter;  the  use  of  the  term  corpora- 
tion in  its  creation  is  of  itself  unimportant,  except  as  it  will 
imply  tlie  possession  of  these.  They  may  be  expressly  con- 
ferred, and  then  they  denote  this  legal  being  as  unerringly 
as  if  created  in  general  terms.  It  has  been  well  said  by 
learned  expounders,  that  a  corporation  aggregate  is  an  arti- 
ficial body  of  men.  composed  of  divers  individuals,  the  liga- 
iiicnts  of  which  body  arc  the  franchises  and  liberties  be- 
stowed upon  it,  which  bind  and  unite  all  into  one,  and  in 
which  consists  the  whole  frame  and  essence  of  the  corpora- 
tion. The  "franchises  and  liberties,"  or,  in  more  modern 
language,  and  as  more  strictly  applicable  to  private  corpora- 
tions, the  powers  and  faculties,  which  are  usually  specified 
as  creating  corporate  existence,  are:  i.  The  capacity  of 
perpetual  succession;  2.  The  power  to  sue  and  be  sued, 
and  to  grant  and  receive  in  its  corporate  name;  3.  To  pur- 
chase and  hold  real  and  personal  estate ;  4.  To  have  a  com- 
mon seal;  and  5.  To  make  by-laws.  These  indicia  were 
given  by  judges  and  elementary  writers  at  a  very  early 
day:  since  which  time  the  institutions  have  greatly  multi- 
plied, their  practical  operation  and  use  have  been  thor- 
oughly tested,  and  their  peculiar  and  essential  properties 
mucli  better  understood.     Any  one  comprehending  the  scope 


THOMAS  V.  DAKIN— WARNER  z:  BEERS  455 

and  purpose  of  them,  at  this  day,  will  not  fail  to  perceive 
that  some  of  the  powers  above  specified  are  of  trifling  im- 
portance, while  others  are  wholly  unessential.  For  instance, 
the  power  to  purchase  and  hold  real  estate  is  no  otherwise 
essential  than  to  afford  a  place  of  business ;  and  the  right  to 
use  a  common  seal,  or  to  make  by-lazvs,  may  be  dispensed 
with  altogether.  For  as  to  the  one,  it  is  now  well  settled 
that  corporations  may  contract  by  resolution,  or  through 
agents,  without  seal ;  and  as  to  the  other,  the  power  is  un- 
necessary, in  all  cases  where  the  charter  sufficiently  pro- 
vides for  the  government  of  the  body.  The  distinguishing 
feature,  far  above  all  others,  is  the  capacity  conferred,  by 
which  a  perpetual  succession  of  different  persons  shall  be 
regarded  in  the  lazv  as  one  and  the  same  body,  and  may  at 
all  times  act  in  fulfilment  of  the  objects  of  the  association 
as  a  single  individual.  In  this  way,  a  legal  existence,  a  body 
corporate,  an  artificial  being,  is  constituted;  the  creation  of 
which  enables  any  number  of  persons  to  be  concerned  in 
accomplishing  a  particular  object,  as  one  man.  While  the 
aggregate  means  and  influence  of  all  are  wielded  in  effect- 
ing it,  the  operation  is  conducted  with  the  simplicity  and  in- 
dividuality of  a  natural  person.  In  this  consists  the  essence 
and  great  value  of  these  institutions.  Hence  it  is  apparent 
that  the  only  properties  that  can  be  regarded  strictly  as  es- 
sential, are  those  which  are  indispensible  to  mould  the  dif- 
ferent persons  into  this  artificial  being,  and  thereby  enable 
it  to  act  in  the  way  above  stated.  When  once  constituted, 
this  legal  being  created,  the  powers  and  faculties  that  may 
be  conferred  are  various — limited  or  enlarged,  at  the  dis- 
cretion of  the  legislature,  and  will  depend  upon  the  nature 
and  object  of  the  institution,  whfch  is  as  competent  as  a  na- 
tural person  to  receive  and  enjoy  them.  We  may,  in  short, 
conclude  by  saying,  with  the  most  approved  authorities  at 
this  day,  that  the  essence  of  a  corporation  consists  in  a  ca- 
pacity: I.  To  have  perpetual  succession  under  a  special 
name,  and  in  an  artificial  form ;  2.  To  take  and  grant  prop- 
erty, contract  obligations,  sue  and  be  sued  by  its  corporate 


456  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

name  as  an  individual;  and  3.  To  receive  and  enjoy  in  com- 
mon, grants  of  privileges  and  immunities. 

We  will  now  endeavor  to  ascertain  with  exactness  the 
powers  and  attributes  conferred  upon  these  associations  by 
virtue  of  the  statute.  The  first  fourteen  sections  (i  to  14) 
prescribe  the  duties  of  the  comptroller  in  furnishing  notes 
for  circulation,  taking  the  required  securities,  &c.  The 
15th  provides,  that  any  number  of  persons  may  associate  to 
establish  offices  of  discount,  deposit  and  circulation.  The 
i6th,  that  they  shall  make  and  file  a  certificate,  specifying: 
I.  The  name  to  be  used  in  the  business;  2.  The  place  where 
the  business  shall  be  carried  on;  3.  The  amount  of  capital 
stock,  and  number  of  shares  into  which  divided ;  4.  The 
names  of  the  shareJwlders;  5.  The  duration  of  the  associa- 
tion. The  1 8th  confers  upon  the  persons  thus  associating, 
the  most  ample  powers  for  cariwing  on  banking  operations, 
together  with  the  right  "to  exercise  such  incidental  powers 
as  shall  be  necessary  to  carry  on  such  business ;  also  to 
choose  a  president,  vice  president,  cashier,  and  such  other 
officers  and  agents  as  may  be  necessary.  By  the  21st  and 
22d  sections,  contracts,  notes,  bills.  &c..  shall  be  signed  by 
the  president  and  cashier;  and  all  suits,  actions,  &c..  are  to 
be  brought  in  the  name  of,  and  also  against  the  president 
for  the  time  being;  and  not  to  abate  by  his  death,  resigna- 
tion or  removal,  but  to  be  continued  in  the  name  of  the  suc- 
cessor. 24th  section :  The  association  may  purchase  and 
hold  real  estate,  &c.,  the  conveyance  to  be  made  to  the  pres- 
ident, or  such  other  officer  as  shall  be  designated,  who  may 
sell  and  convey  the  same  free  from  any  claim  against  share- 
holders. 19th  section:  The  shares  of  capital  stock  to  be 
deemed  personal  property,  transferrable  on  the  books  of  the 
association;  and  every  person  becoming  a  shareholder  by 
such  transfer,  shall  succeed  to  all  the  rights  and  liabilities 
of  the  prior  holder.  23d  section:  No  shareholder  to  be 
personally  liable;  and  the  association  is  not  to  be  dissolved 
bv  the  death  or  insanity  of  any  shareholder. 

I.   Upon  a  perusal  of  these  provisions,  it  will  appear 


THOMAS  V.  DAKIN— WARNER  v.  BEERS  457 

that  the  association  acquires  the  power  to  raise  and  hold  for 
common  use  any  given  amount  of  capital  stock  for  banking 
purposes,  which,  when  subscribed,  is  made  personal  prop- 
erty, and  the  several  shares  transferrable  the  same  and  with 
like  effect  as  in  case  of  corporate  stock ;  to  assume  a  com- 
mon name  under  which  to  manage  all  the  affairs  of  the  as- 
sociation ;  to  choose  all  officers  and  agents  that  may  be  nec- 
essary for  the  purpose,  and  remove  and  appoint  them  at 
pleasure.  It  will  hence  be  seen,  that  although  the  associa- 
tion may  be  composed  of  a  number  of  different  persons, 
holding  an  interest  in  the  capital  stock,  its  operations  are 
so  arranged  that  they  do  not  appear  in  conducting  its  af- 
fairs; all  are  so  bound  together,  so  moulded  into  one,  as  to 
constitute  but  a  single  body,  represented  by  a  common  name, 
or  names  (the  knot  of  the  combination),  and  in  which  all 
the  business  of  the  institution  is  conducted  by  common 
agents.  In  this  way  it  purchases  and  holds  -real  and  per- 
sonal property,  contracts  obligations,  discounts  bills,  notes 
and  other  evidences  of  debt,  receives  deposits,  buys  gold 
and  silver  bullion,  bills  of  exchange,  &c.,  loans  money,  sues 
and  is  sued,  &c.  It  is  true,  some  portion  of  the  business  is 
conducted  in  the  assumed  name,  and  some  in  the  name  of 
the  president  for  the  time  being;  but  this  in  no  manner 
changes  the  character  of  the  body.  A  corporation  may 
have  more  than  one  name;  it  may  have  one  in  which  to 
contract,  grant,  &c.,  and  another  in  which  to  sue  and  be 
sued ;  so  it  may  be  known  by  two  different  names,  and  may 
sue  and  be  sued  in  either;  and  the  name  of  the  president, 
his  official  name,  or  any  other,  will  answer  every  purpose. 
2  Bacon's  Abr.  5.  2  Salk.  451.  2  id.  237.  Ld.  Raym.  153, 
680.  The  only  material  circumstance  is,  a  name,  or  names, 
of  some  kind,  in  which  all  the  affairs  of  the  company  may 
be  conducted.  So  much,  and  no  more,  is  essential  to  give 
simplicity  and  effect  to  the  operation.  An  artificial  being  is 
thus  plainly  created,  capable  of  receiving  all  the  ample  pow- 
ers and  privileges  conferred  upon  the  associations,  and  of 
managing  their  diversified  concerns  in  an  individual  capac- 


458  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

ity.  All  business  is  to  be  conducted  in  a  common  or  proper 
name. 

2.  This  artificial  being  possesses  the  powers  of  per- 
petual succession.  Neither  sole  of  shares,  or  death  of  share- 
holders affect  it ;  if  one  should  sell  his  interest,  or  die,  the 
purchaser  or  representative,  by  operation  of  law,  immedi- 
ately takes  his  place.  Sec.  19.  Nor  can  the  insanity  of  a 
member  work  a  dissolution.  /(/.  Officers  and  agents  for 
conducting  the  business  of  the  association  are  secured.  In 
case  of  vacancy,  by  death  or  otherwise,  the  place  may  at 
once  be  filled.  Sec.  18.  For  the  entire  duration,  therefore, 
of  the  association,  and  which  may  be  without  limit,  Sec. 
16,  siib.  5,  the  whole  body  of  shareholders,  though  perpet- 
ually shifting,  constitute  the  same  uniform,  artificial  being 
which  is  to  be  engaged  through  the  instrumentality  of  offi- 
cers and  agents  in  conducting  the  business  of  the  concern, 
and  no  member  is  personally  liable.  Sec.  23.  Then,  as  to 
the  powers  conferred,  without  again  specially  recurring  to 
them,  it  will  be  seen  at  once  that  the  associations  possess 
all  that  are  deemed  essential,  according  to  the  most  ap- 
proved authorities,  to  constitute  a  corporate  body.  They 
have  a  capacity :  i .  To  have  perpetual  succession  under  a 
common  name,  and  in  an  artificial  form ;  2.  To  take  and 
grant  property,  contract  obligations,  to  sue  and  be  sued  by 
its  corporate  name,  in  the  same  manner  as  an  individual ; 
3.  To  receive  grants  of  privileges  and  immunities,  and  to 
enjoy  them  in  common.  All  these  are  expressly  granted, 
and  many  more,  besides  the  general  sweeping  clause,  "to 
exercise  such  incidental  powers  as  shall  be  necessary  to 
carry  on  such  business"  (meaning  the  business  of  banking), 
under  which  even  the  seal  and  right  to  make  by-laws  are 
clearly  embraced,  if  essential  in  conducting  the  affairs  of 
the  institution. 

The  judgment  was  for  the  plaintiff,  the  majority  of  the 
Court  holding,  that,  although  the  association  was  a  corpora- 
tion the  act  was  constitutional  on  the  assumption  that  it  was 
passed  by  a  two-thirds  vote  of  the  members  elected  to  each 


THOMAS  V.  DAKIN— WARNER  v.  BEERS  459 

branch  of  the  legislature,  and  the  demurrer  not  reaching 
the  objection  that  the  act  had  not  received  the  required 
two-thirds,  though  such  an  objection  might  be  reached  by 
plea. 

Senator  Verplanck  :  The  decision  of  these  causes 
seems  to  me  to  depend  wholly  upon  that  of  the  c[uestion. 
whether  or  no  associations  with  constitutions,  powders  and 
incidents,  similar  to  those  authorized  under  the  General 
Banking  Law,  are  bodies  corporate  and  politic ;  or,  in  other 
words,  whether  the  General  Banking  Law  of  1838  is  void, 
because  it  was  not  passed  with  the  expressed  assent  of  two- 
thirds  of  all  the  members  of  the  legislature.     *     *     * 

What,  then,  is  the  strict  definition  of  the  phrase  bodies 
politic  and  corporate?     *     *     * 

Strict  and  essential  definitions  can  generally  be  given 
of  the  terms  of  positive  jurisprudence,  and  particularly  so 
in  the  extremely  technical  and  artificial  system  of  the  ancient 
English  law.  This  is  remarkably  the  case,  for  instance,  in 
regard  to  our  common  law  terms  of  real  estate,  as  fee,  lease, 
warranty,  grant,  covenant,  reversion,  remainder,  &c. ;  all 
of  which  are  defined  precisely  and  essentially,  not  explained 
by  mere  attributes.  Bodies  corporate  belong  to  that  system, 
and  thence  do  w'e  immediately  derive  them.  What,  then,  is 
a  body  corporate  ?  What  is  its  necessary  and  essential  mean- 
ing? "It  is  called  a  body  corporate,"  says  Lord  Coke,  "be- 
cause the  persons  composing  it  are  made  into  one  body."  "It 
is  only  in  abstracto,  and  rests  only  in  contemplation  of  law." 
10  R.  50.  So  again,  he  says,  i  Inst.  202.  250,  "Persons 
capable  of  purchasing  are  of  two  sorts — persons  natural  cre- 
ated of  God.  and  persons  created  by  the  policy  of  man,  as 
persons  incorporated  into  a  body  politic."  If,  leaving  the 
quaint  scholastic  teaching  of  the  father  of  English  law,  we 
come  to  the  clearer  and  directer  sense  of  our  own  Marshall, 
we  find  the  same  prevailing  idea.  "A  body  corporate  is  an 
artificial  being,  invisible,  intangible,  existing  only  in  con- 
templation of  law.  Being  the  creature  of  law,  it  possesses 
,only  the  properties  conferred  upon  it  by  its  charter.    Among 


460  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

the  most  important  of  these  are  immortahty,  and,  if  the  ex- 
pression may  be  allowed,  individuality/'  4  Wh.  R.  636;  i 
Peters,  R.  46.  Again :  "It  is  precisely  what  the  act  of  incor- 
poration makes  it ;  derives  all  its  powers  from  that  act,  and 
is  capable  of  exerting  its  facnlties  only  in  the  manner  which 
that  act  authorizes."  "Within  the  limits  of  the  properties 
conferred  by  its  charter,  it  can,"  says  Blackstone,  "do  all  acts 
as  natural  persons  may."  "In  corporations,"  says  Professor 
Woodeson,  "individuals  are  invested  by  the  law  with  a  polit- 
ical character  and  personality,  wholly  distinct  from  their 
natural  capacity."  "A  corporation,"  says  Kyd  on  Corpora- 
tions, 13,  "is  not  a  mere  capacity,  but  a  political  person  in 
which  many  capacities  reside."  Thus,  then,  the  essential  legal 
definition  that  covers  the  whole  ground,  and  expresses  the 
very  essence  of  the  being  of  a  body  corporate,  is  this :  "It 
is  an  artificial  legal  person,  a  succession  of  individuals,  or 
an  aggregate  body  considered  by  the  law  as  a  single  con- 
tinuous person,  limited  to  one  peculiar  mode  of  action,  and 
having  power  only  of  the  kind  and  degree  prescribed  by  the 
law  which  confers  them."  Such  is  the  established  notion  of 
our  common  law.  Such,  too,  as  far  as  I  can  trace  it,  is  the 
doctrine  of  the  modern  civil  law,  as  modified  by  the  jurispru- 
dence of  the  European  continent.  "Communities  that  are 
lawfully  established  (i.  e.  corporations),"  says  Domat,  one 
of  the  great  teachers  of  the  ante-revolutionary  French  civil 
law,  "are  in  the  place  of  persons,  and  their  union,  which 
renders  common  all  their  interest,  make  them  to  be  consid- 
ered as  otic  single  person.  Douiat,  Civil  Law,  Lib.  i,  tit.  15. 
To  the  same  effect  a  somewhat  older  Italian  civilian  speaks, 
Oldradus  De  Ponte,  as  cjuoted  by  Sir  Robert  Sawyer,  in 
his  very  able  and  learned  argument  in  the  case  of  the  city  of 
London.  8  St.  Tr.  1 175.  ''Licet  noii  habent  verain  personam, 
habent  personam  fictione  juris/'  So  the  older  German  juris- 
prudence, as  founded  on  the  Roman  law,  also  held  the  idea 
of  personality  as  essential  to  corporations.  Heineccius,  one 
of  the  most  distinguished  civilians  of  that  school  in  the  last 
century,  in  his  instructive  essay  on  the  legal  history  of  the 


THOMAS  V.  DAKIN— WARNER  v.  BEERS  461 

corporate  (juilds  or  societies  of  trade  so  common  in  Germany, 
speaks  of  this  personality  as  an  attril^ute  of  all  corporations. 
"Uniz'crsitatcs  cf  coutrahcrc possitiit  ct  dclinqucrc,  quippc  qiicc 
luoralifcr  iiiiain  rcprrsciitaiif  pcrsoiiain:"  Dc  Collegiis  Ofnfi- 
ciini,  in  Gcnnaiiia,  cap.  yy,  Sec.  19.  This  doctrine  of  the 
modern  civilians  of  France,  Italy  and  Germany,  may  be 
traced  np  even  to  the  jnrists  of  the  Code  and  Pandects.  Per- 
soNAE  z'icc  fuiiyitur  iiinnicipiiuii  ct  dccuria."  Pan.  i,  22,  dc 
fide  jiiss.  I  do  not  cite  these  civilians  as  direct  authorities, 
but  mainly  to  show  how  deeply  and  generally  this  pervading 
idea  of  legal  personality  and  artificial  individuality  entered 
into  and  formed  the  characteristic  of  all  corporate  bodies,  in 
those  systems  of  law  which  might  indirectly  affect  or  govern 
our  own,  or  tend  to  influence  even  the  popular  use  of  our 
legal  terms. 

So  far  was  this  principle  of  corporate  personality  car- 
ried in  our  old  common  law,  that  reasons  were  expressly 
assigned  why  a  corporation  could  not  be  excommunicated 
or  punished  for  crime.  "Because  it  has  no  soul,"  said  Lord 
Coke,  which,  however  ludicrously  it  may  now  sound,  was 
but  saying  quaintly,  and  in  the  style  of  that  day,  what  in 
modern  times  would  be  expressed  by  saying  that  a  corpora- 
tion, being  an  artificial  and  not  a  moral  person,  must  be  in- 
capable of  guilt.  The  very  able  argument  in  the  celebrated 
historical  case  of  the  charter  of  London  in  1682,  went  a 
good  deal  into  these  refinements,  and  it  was  held  on  one  side 
that  a  political  person,  had  a  mind  and  reason,  according  to 
Lord  Chief  Justice  Hobart,  and  that  its  reason  was  expressed 
by  its  by-laws;  whilst  the  attorney-general  (whom  Bishop 
Burnet  has  egregiously  wronged  in  calling  him  "a  hot,  dull 
man),"  argued  most  acutely,  as  well  as  very  learnedly,  in 
support  of  the  capacity  of  a  corporation  to  incur  political,  if 
not  moral,  guilt  and  punishment. 

All  these,  it  is  true,  are  refinements  of  technical  reason- 
ing, in  a  taste  and  fashion  of  thought  which  have  passed 
away ;  but  they  prove  conclusively  how  strong  and  undoubted 


462  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

was  that  legal  principle  of  personality  upon  which  these  mere 
inferences  and  nice  distinctions  were  founded. 

In  order  to  continue  the  existence  of  such  an  artificial 
person,  perpetual  succession  is  ordinarily  necessary,  though 
it  is  not  strictly  essential,  for  it  may  he  confined  to  any  given 
number  of  lives  in  being,  holding  in  a  sort  of  corporate  joint 
tenancy,  of  which  I  think  examples  may  be  found.  x\s  a 
legal  person,  it  has  only  the  powers  and  properties  specifically 
conferred  upon  it ;  and  can  possess  and  exercise  no  others, 
except  such  as  are  absolutely  necessary  to  the  exercise  of 
the  powers  expressly  given.  This  is  the  enactment  of  our 
revised  statutes,  which,  as  our  revisers  rightly  said  in  their 
report  on  that  title  of  the  law,  is  "declaratory  of  a  principle 
of  law  frequently  recognized  by  our  courts,  and  which  it  was 
deemed  useful  to  confirm  jjy  legislative  authority."  To  these 
are  added  certain  legal  incidents  by  the  common  law,  also 
declared  in  our  statute,  and  common  to  all  corporations,  as  to 
sue  and  be  sued,  hold  and  convey  real  and  personal  property, 
to  appoint  officers  for  its  services,  and  to  make  by-laws  for 
the  management  of  its  affairs.  To  these  more  important 
rights,  the  law  adds  the  external  evidence  of  a  name  and  a 
common  seal.  This  last,  though  apparently  a  matter  of 
form,  is  not  without  eft'ect,  any  more  than  the  legal  conse- 
cjuences  of  seals  to  instruments  in  England  and  this  state, 
so  widely  different  from  those  of  other  legal  systems,  where 
the  distinction  between  sealed  and  unsealed  instruments  is 
unknown.  It  is  only  through  a  common  seal  and  name  that 
any  grant  of  lands  or  covenant  touching  them,  can  be  made 
by  a  corporation. 

There  are  several  very  useful  and  beneficial  accessary 
powers  or  attributes,  very  often  accompanying  corporate 
privileges,  especially  in  moneyed  corporations,  which,  in 
the  existing  state  of  our  law,  as  modified  by  statutes,  are 
more  prominent  in  the  public  eye,  and  perhaps  sometimes 
in  the  view  of  our  courts  and  legislatures,  than  those  which 
are  essential  to  the  being  of  a  corporation.  Such  added  pow- 
ers, however  valuable,  are  merely  accessary.    They  do  not 


II 


THOMAS  V.  DAKIN— WARNER  v.  BEERS  463 

in  themselves  alone  confer  a  corporate  character,  and  may 
be  enjoyed  by  unincorporated  individuals.  Such  a  power  is 
the  transferability  of  shares,  whereby  investments  may  be 
made,  without  the  owner  losing  the  future  control  ol  his 
funds  under  changes  of  circumstances.  Such,  too,  is  the 
limited  responsibility  by  which  the  stockholder,  having  once 
fairly  paid  up  his  share  of  the  capital,  is  exempted  from  fur- 
ther personal  liability.  So,  too,  the  convenience  of  holding 
real  estate  for  the  common  purposes,  exempt  from  the  legal 
inconveniences  of  joint  tenancy  or  tenancy  in  common. 
Again :  there  is  the  continuance  of  the  joint  property  for  the 
benefit  and  preservation  of  the  common  fund,  indissoluble  by 
the  death  or  legal  disability  of  any  partner.  Every  one  of 
these  attributes  or  powers,  though  commonly  falling  within 
our  notions  of  a  moneyed  corporation,  is  quite  unessential 
to  the  legality  of  a  corporation,  may  be  found  wdiere  there  is 
no  pretence  of  a  body  corporate,  nor  will  they  make  one  if 
all  were  combined,  without  the  presence  of  the  essential  qual- 
ity of  legal  individuality.  This  distinction  has  been  observed 
and  marked  by  Mr.  Kyd,  Kyd  on  Corporations,  13,  with  log- 
ical acuteness  and  precision:  "A  corporation  is  a  political 
person,  capable,  like  a  natural  person  of  enjoying  a  variety 
of  franchises.  It  is  to  a  franchise  as  the  substance  to  its 
attribute.  It  is  something  to  which  many  attributes  belong, 
but  it  is  itself  something  distinct  from  those  attributes." 

Thus,  the  transferability  of  shares  is  not  essential  to  a 
corporation.  For  instance,  it  does  not  enter  into  the  con- 
stitution of  our  chartered  colleges,  academies,  hospitals,  and 
other  corporate  institutions  founded  by  public  endowment, 
or  private  beneficence.  It  does  not  enter  into  the  charters 
of  incorporated  scientific  and  literary  societies  for  mutual 
benefit  or  charity,  in  the  funds  of  which  the  members  have 
a  beneficial  interest.  On  the  other  hand,  such  a  right  of 
transfer  may  be  incorporated  into  partnership  articles,  and 
become  a  fundamental  condition  of  them.  The  general  rule 
in  absence  of  any  express  stipulation,  is  indeed  the  reverse 
of  this,  and  in  practice  it  is  comparatively  rare  amongst  us. 


464  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

Hence  it  has  become  common  to  consider  such  transfera- 
bihty  as  a  clear  indication  of  a  corporate  character.  "We 
have  seen,"  says  Collycr  on  Partnership,  647,  "that  in  com- 
mon cases,  a  partner  is  precUided  from  assigning  his  interest 
to  a  stranger,  so  as  to  make  that  stranger  a  partner.  To  pre- 
vent this  rnle  from  affecting  the  stockholder  of  a  trading- 
company,  there  mnst  be  provision  in  the  deed  of  settlement 
enabling  each  stockholder  to  assign  or  transfer  his  share." 
He  then  adds  the  limitations  rendered  necessary  in  England 
by  the  Bubble  act,  which  has  no  corresponding  statute  here, 
and  the  conclusion  of  the  English  decisions  is,  that  by  the 
common  law,  shares  may  be  made  transferable  absolutely. 
King  v.  Webb,  14  East,  406.  Pratt  v.  Hutchinson,  15  id. 
515.  Nichols  V.  Crosby,  2  Barn.  &  Cres.  814.  Sec  also  otJicr 
cases  collected  by  IVordswortJi  on  Joint  Stock  Companies. 
Again,  the  joint  stock  companies  authorized  by  statutes  in 
England,  are  avowedly  and  confessedly  not  corporations ; 
and  there,  says  IVordsivorth  on  Joint  Stock  Companies,  183, 
"It  is  the  object  of  all  companies  to  render  their  shares  as 
negotiable  as  possible,  so  that  in  fact  the  restrictions  imposed 
by  the  deed  of  settlement  upon  the  transfer  of  shares  are 
generally  very  few,  and  seldom  extend  beyond  recjuiring  the 
transferrer's  name,  &c.  being  registered  in  the  books  of  the 
company."  The  language  of  two  or  three  of  the  later  acts 
of  parliament  is  specially  worthy  of  attention  on  this  subject. 
They  declare,  as  strongly  as  words  can  declare  legislative 
intention,  that  transferability  of  shares,  and  the  consequent 
succession,  can  be  authorized  in  common  law  copartnerships 
without  giving  to  such  companies  any  corporate  existence, 
or  rendering  them  the  less  copartnerships  in  the  strict  legal 
sense  of  the  term.  In  the  statute  of  6  Geo.  IV,  ch.  42,  it  is 
enacted,  "that  it  shall  iDe  lawful  for  any  member  of  any  such 
society  or  copartnership,  their  respective  executors,  adminis- 
trators or  assigns,  to  sell  and  transfer  any  share  or  shares, 
or  portion  or  portions  of,  or  the  entire  stock  or  interest  which 
any  such  member  may  possess  in  such  society  or  copartner- 
ship, and  the  property  or  funds  thereof,  subject  to  such  reg- 


THOMAS  V.  DAKIN— WARNER  v.  BEERS  465 

ulations  and  restrictions  as  may  be  required  by  the  constitu- 
tion of  such  society  or  copartnership."  This  statute  is  en- 
titled "an  act  for  the  better  regulation  of  copartnerships  of 
certain  bankers  in  Ireland."  The  preamble  and  recitals,  and 
all  the  sections  speak  of  these  banking  firms  as  mere  copart- 
nerships. This  strongly  marked  and  repeated  recognition  of 
them  as  such,  in  the  very  sections  authorizing  that  transfer- 
ability and  its  consequent  succession,  which  have  been  in- 
sisted on  as  infallible  marks  of  corporate  character  leave  no 
doubt  in  my  mind  as  to  the  intention  and  understanding  of 
the  British  parliament,  that  in  authorizing  associations  with 
these  and  other  powers  similar  to  those  granted  by  our  bank- 
ing law,  they  were  not  creating  bodies  politic  or  corporate. 

But  this  is  not  all :  parliament  has  not  left  its  meaning 
and  intention  to  be  a  matter  of  inference.  In  1838,  another 
act  was  passed  amendatory  of  the  one  just  cited,  and  of  an- 
other in  relation  to  bankers  in  England,  which  gave  similar 
powers.  That  amendatory  statute,  after  reciting  and  re- 
ferring to  the  titles  of  these  prior  acts,-  adds  in  the  preamble, 
"and  whereas  it  is  expedient  that  the  said  act  should  be 
amended,  so  far  as  relates  to  the  powers  enabling  any  such 
copartnership,  not  being  a  body  corporate,  to  sue  any  of  its 
own  members,  and  the  powers  enabling  any  member  of  any 
such  copartnership,  not  being  a  body  corporate,  to  sue  the 
said  copartnership.  Be  it  therefore  enacted,  &c.  that  any  per- 
son now  being,  or  who  hereafter  may  be,  a  member  of  any 
copartnership  carrying  on  the  business  of  banking  under 
the  provisions  of  the  said  recited  acts  may  commence  and 
prosecute  any  action,  &c." 

There  can  then  be  no  reasonable  doubt,  that  in  these 
most  deliberately  considered  and  very  technically  drawn  acts 
of  parliament,  recognizing  copartnerships  as  having  transfer- 
able stock,  and  giving  them  the  authority  of  suing  in  the 
name  of  their  officers  and  other  persons,  sinular  to  those  of 
the  associations  formed  under  our  act,  no  bodies  corporate 
were  intended  or  supposed  to  l)e  created. 


466  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

But,  on  this  head  of  transfera])ihty,  we  need  not  rely 
upon  English  authority  in  our  own  usages  and  decisions. 

In  the  articles  of  the  Merchants  Bank  Association,  be- 
fore our  restraining  act,  a  similar  transferability  of  shares 
was  provided,  and  these  articles  have  the  authority  of  Alex- 
ander Hamilton  for  their  validity.  I  shall  have  occasion  to 
refer  to  them  more  fully  hereafter. 

So  again,  in  the  case  of  the  Albany  Exchange,  before 
it  received  its  present  charter,  the  validity  of  the  partner- 
ship or  joint  stock  company  for  a  public  enterprise,  with 
transferable  shares,  was  expressly  recognized.  By  the  Court 
— CowEN,  J. — "The  objection  taken  on  the  argument,  that 
this  association  was  illegal,  as  being  in  the  nature  of  a  cor- 
poration, issuing  scrip  and  providing  for  a  transfer  of  stock, 
is  not  well  founded.  The  act  of  associating  in  this  way  is, 
we  think,  properly  characterized  by  the  exception  taken  at 
the  trial.  It  constitutes  a  partnership  valid,  as  being  formed 
for  the  purposes  of  a  lawful,  honest  enterprise."  Toivnscnd 
V.  Goeivey,  19  Wendell  R.  427.  The  learned  judge  then 
refers  to,  and  adopts  the  authority  of  Collyer  on  Partner- 
ships, p.  624,  and  the  cases  he  cites. 

Again,  this  transferability  may  be  found  in  many  sorts 
of  trusts.  A  well-known  instance  of  this  may  be  seen  in  the 
Tontine  of  New  York,  originally  built  for  the  purposes  of 
a  Merchants'  Exchange.  It  is  a  trust  of  real  estate,  with 
transferable  shares  as  personal  property;  it  was  originally 
settled  by  the  most  eminent  counsel  of  this  state,  and  its 
validity  has  been  attested  by  nearly  fifty  years  experience, 
during  which,  above  two  hundred  shares  have  passed  through 
courts,  assignments,  insolvencies,  I^ankrupt  commissions,  dis- 
tributions of  estates,  &c.,  without  their  legal  transferability 
having  ever  been  impeached.  See  printed  articles  of  the  Ton- 
tine, N.  v.,  1793. 

In  both  of  these  last  examples,  as  in  other  instances  of 
trusts  and  partnershi])s,  lands  were  held  exem])t  by  operation 
of  law  from  the  legal  incidents  of  joint  tenancy,  or  tenancy  in 
common,  and  the  estate  continued  for  the  common  purposes. 


THOMAS  V.  DAKIX— WARXER  v.  BEERS  467 

This  has  been  noted  as  a  mark  of  corporate  character;  yet 
most  corporations  are  Hmited  in  the  extent  of  its  exercise, 
some  are  expressly  excluded  from  the  privilege,  and  very 
many  exist  legally  without  its  actual  exercise  or  enjoynient. 

The  non  dissolution  by  death  or  by  legal  disability,  is 
also  noted  in  the  opinion  of  the  supreme  court  in  these  cases 
as  a  mark  of  a  corporate  body.  But  that  also  may  be  found 
in  the  trusts  just  mentioned,  and  others  of  a  similar  nature, 
and  it  may  be  adopted  as  an  article  of  ordinary  partnership. 
It  is  the  settled  law  of  England,  that  it  may  be  stipulated  that 
death  shall  not  dissolve  the  partnership,  and  further,  that  the 
executors  of  the  deceased  shall  become  partners.  Collycr  on 
Part.  p.  5,  648.  Pease  v.  Chamberlain,  2  Vesey  R.  t^t,.  Hag- 
genuaii  v.  Spears,  7.  Pick.  R.  235.  JJ^re.vJiain  v.  Huddleton, 
I  Swanst.  514. 

Again :  a  common  name  has  been  regarded  as  a  cor- 
porate criteri(^n.  To  this  Lord  Ellenl)orough  gives  a  full 
answer  in  Rex  v.  JVehb.  "As  to  the  fourth  point,  that  the 
subscribers  have  presumed  to  act  as  if  they  were  a  body 
corporate — how  is  this  made  out?  It  was  urged  that  they 
assumed  a  common  name,  that  they  have  a  committee,  &c. 
But  are  these  the  unequivocal  evidence  and  characteristics 
of  a  corporation?  How  many  unincorporated  assurance 
companies  and  other  descriptions  of  persons  are  there  that 
use  a  common  name,  and  have  their  committees,  general 
meetings  and  by-laws?  Are  these  all  illegal?  or  which  of 
these  particulars  can  be  stated  as  being  of  itself  the  distinc- 
tive and  peculiar  criterion  of  a  corporation?"  Thence  he 
infers,  that  "these  suljscribers  have  not  acted  peculiarlv  as  a 
body  corporate."    Rex  v.  Webb,  14  East's  R.  406. 

But,  perhaps,  in  a  general  and  popular  understanding, 
the  most  familiar  distinction  between  corporate  bodies  and 
common  partnerships,  or  other  joint  undertakings,  is  the 
exemption  of  the  associates  from  personal  liability  beyond 
the  actual  amount  of  their  respective  proportions  of  the  cap- 
ital. The  regarding  this  very  frequent  and  important  inci- 
dent of  a  corporation  as  an  essential  characteristic,  seems 


468  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

not  to  be  confined  to  popular  opinion.  Judge  Cowen  says, 
in  the  decision  of  the  cases  now  before  us :  "Among  other 
peculiar  privileges  conferred  on  these  associations,  and  not 
enjoyed  by  natural  persons,  I  allude  to  that  of  the  exemption 
of  members  from  personal  liability  for  debt.  This  is  men- 
tioned by  Angell  &  Ames,  in  their  treatise,  as  peculiar  to 
a  private  corporation ;  they  notice  it  as  a  striking  character- 
istic between  a  corporation  and  a  partnership."  Yet  our 
own  statute  of  limited  partnerships  affords  sufficient  evidence 
that  an  alteration  of  the  existing  law  may  be  made  by  statute, 
so  as  to  exempt  from  personal  liability  beyond  the  stipulated 
share  in  the  joint  funds,  for  the  debts,  of  a  firm,  without  the 
remotest  thought  of  converting  such  firms  into  bodies  cor- 
porate. Besides,  the  right  of  making  a  contract,  whereby 
those  who  tender  it  stipulate  not  to  be  bound  beyond  the 
amount  of  some  specific  pledged  fund,  must  be  a  natural 
right  growing  out  of  the  very  nature  of  contracts.  If 
a  company  or  association,  or  an  individual,  offers  to 
contract  to  make  certain  payments  only  to  the  amount  of 
certain  specific  funds,  and  others  choose  to  accept  that 
contract  on  those  conditions,  there  can  be  nothing  to 
prevent  the  validity  of  such  a  contract,  except  some  positive 
rule  of  law  founded  on  policy  or  an  arbitrary  enactment.  In 
the  absence  of  such  a  restriction,  it  is  and  must  be  good. 
Such  a  limitation,  then,  must  be  binding  on  all  who  accept 
the  conditions.  The  policy  of  our  law  and  the  usages  of  bus- 
iness have,  indeed,  rightly  fixed  the  presumption  the  other 
way,  so  that  the  stipulation  and  the  burden  of  proof  of  the 
limited  indebtedness  are  thrown  upon  those  who  expect  to 
be  benefitted  by  them.  This  right  has  been  substantially  ad- 
mitted by  the  highest  triljunal  in  Great  Britain,  in  the  case  of 
Minnct  v.  Whinncry,  3  Brown's  Pari.  Cas.  323,  and  it  was 
held  to  be  good  by  Lord  Ellenborough,  in  Aldcrson  v.  Clay, 
I  Camp.  404.  The  doctrine  has  been  received  as  settled  law 
bv  one  of  the  best  elementary  writers  of  the  day,  often  cited 
by  our  own  supreme  court.  "When  a  creditor,"  says  CoUycr 
on  Partnership,  214,  "has  notice,  that  by  an  arrangement 


THOMAS  7:  DAKIN— WARNER  7:  BEERS  469 

between  partners,  one  of  them,  though  appearing  to  the  world 
as  a  partner,  shall  not  participate  in  the  loss,  and  shall  not  be 
liable  for  it,  the  creditor  will  be  bound  by  the  arrangement." 

The  original  articles  of  the  Merchants'  Bank,  in  the 
city  of  New  York,  as  an  unincorporated  association,  with 
limited  liability,  as  well  as  transferable  shares,  which  were 
read  in  argument  by  Mr.  Kent,  have  the  great  professional 
authority  of  Alexander  Hamilton,  who  prepared  them,  and 
of  the  many  eminent  men  who  joined  in  them,  and  whose 
professional  distinction  gives  to  their  approbation  the  char- 
acter of  a  sort  of  judicial  sanction ;  whilst  the  restraining  act 
passed  soon  after,  proves,  as  was  unanswerably  argued,  that 
the  legislature  and  its  legal  advisers  considered  such  a  volun- 
tary association,  thus  restraining  its  own  liability,  not  as  a 
violation  of  common  law,  but  merely  as  contradicting  the 
financial  policy  of  the  state. 

A  similar  analysis  of  such  of  the  customary  accessary 
powers  of  specially  chartered  moneyed  corporations,  as  from 
being  most  conducive  to  ends  of  profit  or  convenience  are 
ordinarily  considered  as  the  essential  qualities  constituting 
corporations,  will  show,  that  all  such  powers  or  incidents 
are  merely  convenient  and  desirable  authorities  or  modes  of 
action,  added  to  and  engrafted  upon  the  creation  of  a  body 
politic;  not  the  legal  attributes  absolutely  essential  to  a  cor- 
poration, and  denoting  its  existence  as  such. 

Amongst  us,  as  in  England,  bodies  politic  or  corporate 
may  exist  where  the  ultimate  personal  liability  is  still  re- 
tained. The  personal  liability  is  indeed  suspended  in  such 
cases,  and  for  a  time  merged  in  that  of  the  artificial  corporate 
person ;  but  there  may  l)e  an  ulterior  recourse  to  the  corpo- 
rators when  the  former  fails.  Many  corporate  banks  in  other 
states  are  so  constituted,  and  with  us  some  chartered  com- 
panies for  insurance,  &c.,  some  for  an  indefinite,  others  to 
a  limited  extent  beyond  the  capital.  Corporate  bodies  may 
exist  also  without  transferability  of  the  rights  of  the  corpora- 
tors; for  a  large  majority  of  our  literary  and  charitable,  as 
well  as  all  our  municipal  corporations,  are  so.     On  the  other 


470  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

liand,  l)y  oiir  own  common  law  as  it  would  exist  now,  inde- 
pendently of  statutory  restrictions,  associations  might  be 
formed  and  trusts  created,  having  every  one  of  the  above 
enumerated  characteristics,  which  have  been  insisted  upon 
as  essential  to  a  corporation,  except  that  personality  which 
I  before  stated  as  forming  its  strict  and  necessary  essential 
legal  definition.  The  present  joint  stock  companies  of  Eng- 
land afford  pregnant  examples,  showing  how  many  of  these 
attributes  may  be  embodied  in  voluntary  associations  which 
are  confessedly  not  corporations. 

In  fact  the  line  may  be  very  faint,  and  depending  wholly 
upon  the  purely  legal  and  technical  character  conferred, 
whether  a  joint  stock  association  or  a  trust,  freed  by  law 
from  certain  positive  restraints  imposed  by  our  modern 
statutes,  be  a  corporation  or  not.  The  Tontine  trust,  before 
mentioned,  is  managed  by  directors  annually  elected  by 
stockholders ;  its  real  estate  is  held  by  trustees,  continuing 
their  trust  from  hand  to  hand  during  the  lives  of  the  orig- 
inal nominees  and  the  survivors  of  them,  with  transferable 
shares,  and  wholly  without  personal  liability.  For  the  rea- 
sons already  stated,  the  eminence  of  the  counsel  (the  late 
R.  Harrison)  who  prepared  the  trust,  and  the  frequency 
with  which  its  legal  character  must  have  passed  in  review 
before  lawyers  and  courts,  and  always  without  objection,  it 
may  well  be  regarded  as  sanctioned  judicially.  It  is  a  valid 
trust.  Add  to  it  a  legislative  charter,  making  the  associates 
a  body  corporate  and  no  more,  what  then  is  the  effect  ?  Sim- 
ply to  give  a  different  technical  character,  an  artificial  ijidi- 
vidiiality,  in  Chief  Justice  Marshall's  phrase,  a  different 
mode  of  standing  in  courts. 

Such  was  the  actual  history  of  the  Albany  Exchange. 
It  was  a  joint  stock  company,  formally  decided  to  be  valid. 
19  Wendell's  R.  427.  A  year  or  two  after  (1837),  it  ap- 
pears by  our  statute  book  to  have  been  incorporated.  But 
there  is  probably  but  little  difference,  besides  the  greater 
convenience  of  the  corporate  body,  between  the  former  or- 
ganization and  the  present. 


THOMAS  7'.  DAKIX— WARNER  r.  BEERS  471 

The  trusts  specially  permitted  1)y  an  act  of  last  year, 
Statutes  of  1839,  chap.  174,  for  the  benefit  of  that  singular 
people  called  SJiakcrs,  were  nothing  more  than  exemptions 
from  the  recent  restrictions  of  trusts.  They  were  authorized 
to  continue,  enlarge  and  manage  their  property,  by  trusts, 
as  they  had  done  before  the  change  in  that  title  of  our  law 
effected  by  the  revised  statutes.  Had  the  law,  in  addition 
to  this,  made  every  Shakers"  United  Society  a  body  cor- 
porate, without  otherwise  varying  the  original  trust,  the 
only  change  would  have  been  the  conversion  of  a  trust  into 
an  artificial  legal  person,  with  the  same  effect  substantially 
as  to  the  interests  of  those  beneficially  interested. 

Our  act  for  general  religious  corporations  regulates 
the  incorporation  of  churches  of  all  religious  denominations 
(other  than  those  provided  for  in  the  first  and  second  sec- 
tions) by  trustees,  who  are  to  be  a  body  corporate. 

Those  who  have  had  occasion  to  look  into  the  mode 
in  which  dissenting  religious  trusts  are  held  in  England,  as 
I  presume  they  were,  in  the  same  manner,  in  New  York 
when  a  colony,  will,  I  think,  perceive  that  our  statute  adds 
little  more  than  a  convenient  corporate  character  to  powers 
elsewhere,  and  formerly  here,  exercised  under  trusts. 

All  these  considerations  lead  me  to  the  conviction,  that 
for  the  purpose  of  constitutional  interpretation,  we  must 
look  to  the  strict  legal  meaning  of  the  phrase  body  politic  or 
corporate,  and  not  to  those  circumstances  or  adjuncts,  which 
amount  only  to  descriptions  of  the  manner  in  which  such 
bodies  are  very  frec|uently  constituted  when  used  for  pur- 
poses of  profit.  If  this  be  regarded  as  a  very  strict  rule 
of  interpretation,  let  it  also  be  remembered,  that  it  is  applied 
where  such  strictness  is  most  appropriate,  in  the  interpreta- 
tion of  a  provision,  restraining  the  general  sovereign  power 
of  the  state  expressing  the  pul)lic  will  through  a  majority 
of  the  people's  representatives. 

There  is  yet  another  rule  of  interpretation,  which  it  is 
proper  to  state  bef(n-e  proceeding  to  examine  whether  the 


472  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

associations  organized  under  the  banking  laws  are  or  are 
not  corporations. 

Corporate  rights  are  well  defined  by  Chancellor  Kent 
and  others  to  be  "franchises  or  peculiar  privileged  grants," 
of  the  nature  of  incorporeal  property.  Such  franchises, 
when  they  are  granted  for  pecuniary  or  other  purposes  val- 
uable to  private  interest,  are  of  the  nature  of  monopolies, 
and  are  always  granted  exclusively  by  the  sovereign  power, 
directly  or  indirectly.  It  is  a  well  known  fact  admitted  on 
all  sides,  that  it  was  part  of  the  policy  and  intent  of  our 
amended  constitution,  to  prevent,  by  a  constitutional  and 
fixed  limitation  of  the  legislative  authority,  the  influence 
of  corruption  or  interest  upon  the  legislature,  as  well  as  the 
abuse  of  political  favoritism,  and  the  dangerous  union  of 
political  with  pecuniary  power.  The  clause  so  designed, 
though  so  general  in  its  terms  as  to  include  even  academies 
and  village  corporations,  it  is  not  doubted,  referred  in  its- 
policy  wholly  to  the  monopoly  privileges  of  chartered  cap- 
ital, and  especially  to  banks. 

■  Here  then,  in  my  view,  arises  another  branch  of  in- 
quiry; and  the  two  distinct  objects  of  examination  are  these : 
I  St.  Do  these  banking  associations  fall  within  the  right  legal 
definition  of  the  words  "bodies  politic  or  corporate,"  as 
before  explained  and  established?  2d.  Do  they  come  within 
the  policy  and  intent  of  the  framers  of  the  constitution  or 
of  the  people  who  ratified  it? 

The  most  peculiar,  and  the  strictly  essential  character- 
istic of  a  corporate  body,  which  makes  it  to  be  such,  and  not 
some  other  thing  in  legal  contemplation,  is  the  merging  of 
the  individuals  composing  the  aggregate  body  into  one  dis- 
tinct, artificial  individual  existence.  Now  this  is  not  found 
in  the  associations  under  the  act.  A  corporation  can  sue  and 
be  sued  only  by  its  corporate  name.  It  can  act  only  accord- 
ing to  the  letter  of  the  law  creating  it.  "It  derives  all  its 
powers  from  that  act,"  says  Chief  Justice  Marshall,  "and  is 
capable  of  exercising  its  faculties  only  in  the  manner  which 
that  act  authorizes."     It  has  no  natural  powers  which,  in 


THOMAS  V.  DAKIN— WARNER  v.  BEERS  473 

its  discretion,  it  may  exercise  or  not.  It  can  exercise  none 
of  those  other  powers,  and  possesses  none  of  those  other 
rights  which  the  individuals  composing  it  could  possess  and 
exercise,  were  it  a  mere  society  or  partnership.  Not  so  as 
to  these  associations.  By  this  act,  suits  on  behalf  of  such 
associations  may  be  brought  in  the  name  of  the  president. 
Persons  having  claims  against  the  company,  may  maintain 
their  actions  against  the  president.  But  there  is  no  reason, 
except  that  of  mere  convenience,  why  the  association  may 
not  also  sue  and  be  sued  under  their  several  real  names,  as 
other  partners  may.  This  reason  of  convenience,  it  is  ob- 
vious, would  not  apply  where  the  company  was  composed 
of  a  few  persons,  as  if,  for  example,  one  of  our  great  bank- 
ing firms  were  to  come  under  the  law. 

It  was  indeed  argued,  that  the  technical  construction 
which  gives  to  may  the  meaning  of  must  or  shall,  applies 
here.  Biit  that  construction  holds  only  when  there  is  a  pre- 
vious duty,  to  which  the  statute  adds  some  new  power  or 
authority,  as  in  the  case  of  a  public  officer;  or  where  from 
other  reasons  it  is  manifest  that  (to  use  Judge  Story's 
words)  "the  legislature  meant  to  impose  an  absolute  duty, 
not  to  give  a  discretionary  power;"  otherwise,  as  he  says, 
"the  ordinary  use  of  language  must  be  presumed  to  be  in- 
tended, unless  it  would  defeat  the  provisions  of  the  act."  i 
Peters'  R.  64.  The  ordinary  popular  discretionary  sense  of 
the"  word  may,  is  also  the  ordinary  legal  one.  The  other 
is  the  exception.  In  our  revised  statutes,  the  words  may  and 
shall  are  so  used  and  distinguished.  So  they  are  in  our 
annual  legislation,  as  when  it  is  said  of  a  company,  that  it 
may  hold  real  estate,  may  take  a  certain  rate  of  tolls,  may 
borrow  money. 

Moreover,  here  the  right  to  sue  and  be  sued  as  other 
partners,  is  a  common  law  right,  and  cannot  be  taken  away 
by  mere  implication.  "A  statute  made  in  the  affirmative, 
without  negative  words,"  say  the  highest  authorities,  "does 
not  take  away  the  common  law."     2  Inst.  200.     Sec  also 


474  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

Dzvarris  on  Sfatiifcs,  637.  and  the  authorities  tJicrc  referred 
to. 

To  return  :  if  the  associations  issue  notes  for  circulation, 
they  must  first  comply  with  the  express  conditions  of  the 
act  as  to  the  requisite  security.  So  far  as  they  deal  with 
the  public  as  bankers,  they  must,  for  the  common  security, 
comply  with  the  requisition  of  the  statute.  But  if  such  an 
association  were  a  body  corporate,  it  could  do  nothing  more 
tlian  the  act  permits,  and  that  only  in  the  manner  the  act 
prescribes.  In  the  words  of  our  revised  statutes  (declara- 
tory, as  the  revisers  state,  of  the  common  law),  "No  cor- 
poration shall  possess  or  exercise  any  corporate  powers  (in 
addition  to  those  expressly  given  in  the  act  under  which  it 
is  incorporated),  except  such  as  shall  be  necessary  to  the 
exercise  of  the  powers  enumerated  and  given."  In  the  per 
curiam  opinion  of  the  supreme  court  of  the  United  States, 
4  Peters'  R.  179,  it  is  said  that  "a  corporation  is  strictly  lim- 
ited to  the  exercise  of  powers  specifically  conferred,  cannot 
be  denied."  But  here,  the  associates  by  their  articles  estab- 
lish and  form  their  own  constitution,  as  any  other  voluntary 
joint  stock  company  may  do.  Nor  can  I  discover  any  objec- 
tion, other  than  such  as  the  articles  might  present,  or  pru- 
dence dictate,  why  the  association,  whilst  as  bankers  com- 
plying with  the  requisitions  of  the  act,  could  not  also 
exercise  their  common  legal  rights  as  partners,  in  other  com- 
merce, waiving  so  far  the  advantages  of  exemption  from 
personal  liability.  So,  too,  it  seems  that  waiving  the  trans- 
ferability of  shares,  the  same  associates  might  also  trade  as 
a  limited  partnership,  with  its  president  as  the  general  part- 
ner, and  the  others,  special  partners,  in  any  business  coming 
within  the  statute  on  that  subject.  Some  such  union  of 
banking  with  other  collateral  business  might  well  take  place, 
whenever  such  an  association  shall  consist  of  a  small  but 
wealthy  firm.  An  association  under  this  act  might  then 
do  what  no  corporation  can  do.  The  same  association  under 
the  same  articles,  might  have  one  fund  for  its  special  bank- 


THOMAS  V.  DAKIN— WARNER  v.  BEERS  475 

ing"  purposes  with  a  liimted  liability  of  its  owners,  and  an- 
other for  trade  as  general,  or  even  as  limited  partners. 

Again :  these  associations  do  not  act  by  a  corporate 
name  and  seal,  but  by  another  mode  familiar  to  our^law. 
They  can  contract  through  their  president,  as  a  limited  part- 
nership must  through  its  general  partner.  They  are  author- 
ized to  sue  and  be  sued  through  him ;  as  Judge  Cowen  ob- 
serves, "the  power  of  the  legislature  to  give  a  right  of  action 
to  one  man  in  his  own  name  for  a  debt  due  to  another,  has 
always  been  exercised  from  our  earliest  legal  history,  and 
it  is  now  too  late  to  call  it  in  question."  I  refer  to  the 
several  legislative  and  judicial  authorities  which  he  has  col- 
lected in  his  opinion  on  these  cases.  They  cannot  hold  real 
estate  as  a  corporation  does,  or  contract  concerning  it  by 
their  own  name  and  common  seal ;  but,  like  partnerships, 
they  can  have  an  equitable  and  beneficial  interest  in  land. 
Collyer,  70,  76.  Their  president  takes  as  a  trustee,  and  the 
associates  are  but  beneficiaries. 

Similar  interests  in  land  are  held  in  trust,  as  in  the 
New  York  Tontine  and  other  old  unincorporated  associa- 
tions ;  and  by  the  Shakers,  on  trusts  established  before  the 
statute  restraining  trusts,  and  since  by  means  of  a  private 
act,  merely  restoring  the  common  law  as  respects  them,  by 
taking  them  out  of  the  operation  of  the  statute.  Much  such 
an  interest  in  lands  was  also  held  by  the  Albany  Exchange 
Company  before  its  incorporation,  in  1837,  and  the  decision 
of  our  supreme  court,  in  19  Wendell,  424,  admits  its  validity. 

How  then  are  these  associations  to  be  regarded  in  legal 
contemplation  ? 

I  assent  fully  to  the  conclusive  reasoning  of  the  counsel, 
who  chiefiy  pressed  this  part  of  the  argument  (Mr.  Kent), 
that  they  are  copartnerships  relieved  from  the  inhibitions  of 
the  restraining  act,  and  thus  allowed  to  carry  on  banking 
business  under  certain  conditions.  The  policy  of  the  state 
has  prohibitecT  fts  citizens  from  issuing  paper  for  circulation 
as  money,  or  from  associating  together  for  certain  banking 
purposes,      i   R.   S.   711.     It  reserved  those  privileges  for 


476  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

corporate  banks.  The  act  to  authorize  the  business  of  bank- 
ing repealed  that  prohibition  pro  tanto,  as  to  all  individuals 
or  companies  who  would  comply  with  its  conditions.  The 
associations  in  question  are  partnerships  complying  with 
those  conditions,  and  thus  exempted,  as  any  other  citizens 
may  be  on  the  same  terms,  from  the  operation  of  a  statutory 
restraint  of  general  right,  which  is  still  binding  on  all  who 
will  not  comply  with  the  conditions.  This  is  so  far  in  close 
analogy  to  the  law  of  special  partnership,  where  exemption 
from  the  general  liability  imposed  by  the  law  is  tendered 
to  all  who  comply  strictly  with  the  provisions  of  the  statute. 
The  articles  and  certificate  in  this  act  correspond  to  the  cer- 
tificate setting  forth  the  names  of  partners,  amount  of  cap- 
ital, time  of  termination  and  nature  of  business,  required 
by  the  title  of  "Limited  Partnerships,"  i  R.  S.  764,  and  with 
the  articles  which  every  such  copartnership  must  have.  The 
general  partner  there  is  authorized  to  transact  business  and 
contract  for  the  rest ;  so,  though  with  less  authority,  is  the 
president  here.  The  mode  of  sueing  and  being  sued  is  pre- 
cisely the  same  in  both  cases. 

These  partnerships  are  permitted  to  do  what  it  has  been 
shown  other  partners  may  also  do  by  voluntary  act,  in  pro- 
viding for  the  transferability  of  the  shares  of  the  stock,  and 
also  against  dissolution  by  death  or  insolvency.  If  they 
choose  to  trade  with  a  limited  liability,  always  desirable  when 
the  shares  are  numerous,  they  may  do  so  in  a  somewhat 
more  commodious  manner  than  in  an  ordinary  limited  part- 
nership, though  on  the  very  same  principles.  This,  too,  has 
been  shown  might  also  be  done  on  common  law  principles 
by  means  of  due  notice  (as  in  the  instance  of  the  old  Mer- 
chants' Bank),  without  special  legislation.  If  the  associates 
think  fit  to  waive  this  exemption,  they  may  do  so,  and  they 
are  then  a  banking  company,  carrying  on  business  precisely 
as  any  firm  might  do  upon  a  simple  repeal  of  the  restraining 
act.  Certain  conditions  are  imposed  to  entitle  them  to  the 
benefit  of  this  conditional  repeal.  They  can  issue  no  paper, 
unless  it  be  secured  in  a  certain  way  and  duly  attested  by 


THOMAS  V.  DAKIN— WARNER  v.  BEERS  477 

the  comptroller.  The  very  same  conditions  are  imposed  on 
every  individual  who  thinks  fit  to  engage  in  this  business. 
They  are  allowed  to  purchase  real  estate  and  hold  it  for  cer- 
tain partnership  uses.  So  may  ordinary  partners.  Cojcs  v. 
Coles,  15  Johns.  R.  159.  2  Edw.  Ch.  R.  28.  But  the  convey- 
ance is  to  be  made  to  the  president,  who  has  power  to  sell 
or  assign  the  same  free  from  any  claim  against  any  of  the 
shareholders,  or  persons  claiming  under  them.  This  is 
rather  a  limitation  than  a  grant  of  power.  The  associates 
are  limited  to  their  president,  or  some  other  officer  named 
in  their  articles,  instead  of  choosing  such  a  trustee  as  they 
might  please  at  the  time ;  otherwise,  it  is  with  this  slight 
restriction  a  mode  of  holding  real  estate  familiar  to  the  for- 
mer law  of  trusts  here,  still  used  in  England,  and  for  many 
purposes  yet  allowed  in  this  state.  The  president  or  other 
officer  may  receive  a  conveyance,  and  may  sell  or  assign  the 
lands  so  conveyed.  Thus  he  holds  the  land  in  a  trust, 
coupled  with  a  power  of  disposition,  as  it  would  be  called  in 
England,  or  formerly  here.  This  authority  over  the  lands 
is,  in  the  language  of  our  Revised  Statutes,  "a  power  in 
trust,"  and  the  beneficial  enjoyment  of  such  a  power  is  no 
peculiar  privilege.  The  association  may  sue  and  be  sued, 
just  as  other  partners  may;  but  as  this  would  frequently  be 
of  great  public  inconvenience,  it  is  enacted  for  the  mutual 
benefit  of  the  associates  and  of  those  with  whom  they  may 
litigate,  that  they  may  also  sue  and  be  sued  in  the  name  of 
their  president.  A  mere  innovation  in  the  mode  of  plead- 
ing, as  to  certain  classes  of  citizens,  can  hardly  work  any 
change  in  the  permanent  legal  character  of  those  to  whom 
it  applies.  There  are  various  English  acts,  within  the  last 
twenty  years,  expressly  giving  the  same  powers  to  officers 
or  agents  of  partnerships  in  England  and  Ireland;  a  course 
(^f  legislation  ai)proved  by  Lord  Eldon,  and  still,  in  his  view, 
leaving  such  companies  mere  partnerships,  i  Russ.  R.  460. 
It  is  in  effect  doing  in  this  act  what  had  already  been  done 
in  the  law  of  limited  partnership,  where  it  is  enacted,  that 
"suits  in  relation  to  the  business  of  the  partnership  may  be 


478  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

brought  by  or  against  the  general  partner,  in  the  same  man- 
ner as  if  there  were  no  special  partner."  i  R.  S.  766, 
Sec.  14. 

Had  there  been  a  simple  repeal  of  the  restraining  act, 
so  that  limited  partnershi])s  could  carry  on  this  business, 
there  would  have  hardly  been  any  necessity  for  the  new  pro- 
vision. It  is  to  be  observed,  that  in  both  cases  the  statutes 
say,  may  ( not  shall )  sue  and  be  sued,  which  is  wholly  diverse 
from  the  case  of  corporate  l)odies,  which  can  only  sue  and 
be  sued  in  their  single  corporate  legal  personality.  These, 
then,  are  partnerships,  or  joint  stock  companies,  limited  as 
to  personal  responsibility,  if  they  so  elect,  as  they  might  be 
by  the  common  law  in  one  way,  and  by  our  limited  partner- 
ship act  in  another.  They  may,  if  they  deem  it  expedient, 
make  their  shares  assignable  and  transferable  to  new  part- 
ners, and  their  company  indissoluble  by  death  or  legal  disa- 
bility, of  individuals,  as  other  companies  may  also  do.  They 
may  have  a  beneficial  interest  in  lands,  managed  by  a  power, 
with  the  legal  estate  in  a  trustee.  They  may  sue  and  be  sued 
in  the  name  of  the  head  of  the  firm,  as  limited  partners  also 
may,  and  like  them,  are  capable  of  suing  and  being  sued  in 
the  same  manner  as  ordinary  partners.  Finally,  they  are 
released  from  the  restriction  of  the  restraining  act  on  certain 
conditions  being  performed,  and  may  then  use  their  capital  in 
banking,  as  all  other  firms  might,  were  that  law  wholly 
repealed ;  but  it  does  not  appear  that  they  are  absolutely  re- 
stricted to  that  one  business  and  no  other,  as  incorporated 
banks  are  and  must  be,  unless  specially  authorized  to  transact 
other  business. 

If  this  view  of  their  nature  and  character  be  correct, 
they  <liffer  entirely  in  contemplation  of  law  from  the  legal 
corporate  person,  in  which  all  individualities  of  its  members 
are  merged,  so  far  as  they  act  together  in  this  body,  which 
can  perform  only  certain  specific  acts,  sue  or  be  sued  but  in 
one  way,  grant,  convey  and  covenant  only  in  its  own  name 
and  by  its  common  seal. 

There  is  again  yet  another  wide  difference,  which  to 


THOMAS  r.  DAKIX— WARNER  v.  BEERS  479 

my  mind  strongly  marks  the  broatl  distinction  between  these 
associations,  in  which  partnership  rights  and  HabiHties  are 
still  retained,  and  corporate  bodies,  where  such  prior  joint 
rights  of  the  corporators  are  absorbed  in  the  individuality 
of  the  body  which  takes  the  place  of  the  individuals  who  com- 
pose it.  Corporations  formed  under  an  act  illegally  passed, 
or  unconstitutional  in  itself,  may  be  proceeded  against  by 
quo  warranto,  and  on  judgment  the  body  is  ousted  and  alto- 
gether excluded  from  its  corporate  rights,  privileges  and 
franchises.  2  R.  S.  583.  The  effect  of  this,  where  an  act 
is  pronounced  void,  would  be,  that  the  corporation  becomes 
extinct,  is  abrogated,  has  no  longer  an  existence  in  law.  Now 
let  us  suppose  that  this  act  may  grant  some  corporate  powers, 
as  the  chancellor  has  intimated.  I  do  not  myself  find  them. 
But  we  may  suppose  the  transferability  of  shares,  as  insisted, 
upon  by  our  judges,  to  be  a  corporate  power.  An  informa- 
tion in  the  nature  of  a  quo  ivarrauto  may  be  exhibited  against 
any  association  formed  under  the  banking  law,  and  on  judg- 
ment it  is  ousted  of  this  or  any  other  privilege,  and  excluded 
from  it  as  a  franchise.  Be  it  so.  What  is  the  result?  The 
association,  debarred  from  this  power,  still  remains  a  valid 
company.  The  exemptions  from  the  restraining  law  must 
still  be  valid,  for  such  a  conditional  exemption  has  nothing 
in  common  with  any  question  of  corporate  right.  It  would 
still  remain  a  voluntary  joint  stock  company,  carrying  on 
a  legitimate  business  under  articles  of  partnership,  and  with 
limited  liability  (if  the  associates  elect),  very  similar  to 
other  limited  partnerships  in  trade.  It  would  still  have  its 
common  law  and  statute  partnership  rights  and  powers, 
though  inhibited  from  some  one  or  two  powers  enumer- 
ated in  this  act.  It  would  still  be  what  its  name 
purports,  a  valid  association.  This  criterion  affords 
to  my  mind  conclusive  evidence  of  the  wide  difference  be- 
tween incorporated  banks  and  banking  associations,  and  I 
cannot  but  add  that  it  also  seems  to  me  conclusive  as  to  the 
validity  of  the  act.  If  the  legislature  have  in  any  provision 
inad\-ertcntly  stepped   beyond   their   constitutional   bounds, 


480  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

tliat  pro\-ision  may  be  \'oi(l.  The  main  provisions  of  the  law 
are  within  the  orchnary  bounds  and  purposes  of  general  leg- 
islation, and  the  associations  formed  under  them  are  legal 
and  valid,  e\en  should  there  be  some  power  mentioned  in 
the  act  from  which  the  judgment  of  a  court  may  rightfully 
exclude  them.  It  therefore  appears  to  me  clear,  that  the 
legislature  of  1838  have  succeeded  in  their  obvious  and  in- 
deed avowed  intention  to  authorize  voluntary  associations, 
not  within  the  two-thirds  restriction  of  the  constitution,  or 
of  the  legal  doubts  that  might  arise,  if  they  were  permitted 
to  incorporate  themselves  under  some  general  law.  *  *  * 
On  the  question  being  put.  Shall  these  judgiiicnis  be  re- 
versed? all  the  members  of  the  court,  with  but  a  single  ex- 
ception (tzventy-three  being  present),  voted  in  the  negative. 
Whereupon  the  judgments  of  the  supreme  court  were  af- 
firmed. The  court  thereupon  adopted  the  following  resolu- 
tions : 

1.  "Resolved,  That  the  law  entitled  'An  act  to  authorize 
"the  business  of  banking,'  passed  i8th  April,  1838,  is  valid, 
"and  was  constitutionally  enacted,  although  it  may  not  have 
"received  the  assent  of  two-thirds  of  the  members  elected 
"to  each  branch  of  the  legislature."  This  resolution  was 
adopted  by  a  vote  of  23  to  i. 

2.  "Resolved,  That  the  associations  organized  in  con- 
"formity  with  the  provisions  of  the  act  entitled  'An  act  to 
"authorize  the  business  of  banking,'  passed  April  ist,  1838, 
"are  not  bodies  politic  or  corporate,  within  the  spirit  and 
"meaning  of  the  constitution."  This  resolution  was  adopted 
by  a  vote  of  22  to  3. 


-In  Tlic  People  V.  Assessors  of  IVafertozcii,  i  Hill  616  (1841).  the 
question  arose  in  the  Supreme  Court  whether  an  assoeiation  formed 
under  the  act  was  lia1)le  to  taxation  on  its  capital  stock.  Such  an  asso- 
ciation, the  Bank  of  Watertown,  denied  its  liability  on  the  ground  that 
it  was  not  a  corporation. 

The  Court  held  it  was  a  corporation.  Bronson,  J. :  "That  they  are 
corporations,  was  adjudged  by  this  court  in  the  case  of  Tliomas  v.  Dalcin 
(22  Wend.  9),  and  the  like  judgment  between  other  parties  has  since 
been  affirmed  in  the  Court  for  the  Correction  of  Errors  (JVarner  v. 
Beers,  23  Wendell,  103).  I  am  aware  that  one  or  two  members  of  the 
court  entertained  some  doubt  upon  this  question,  but  they  seem  finally 
to  have  settled  down  upon  the  conclusion,  that  although  these  banking 


THOMAS  V.  DAKIN— WARNER  v.  BEERS  481 

companies  may  be  corporations  for  all  other  purposes,  yet  they  were  not 
so  within  the  spirit  and  meaning  of  that  clause  of  the  Constitution 
which  requires  a  two-thirds  vote  for  the  creation  of  a  body  politic  or 
corporate.  Mr.  Senator  Verplanck,  who  went  further  than  any  one  else 
towards  denying  their  corporate  capacity,  concluded  his  opinion  _with 
the  very  cautious  and  guarded  remark,  that  'these  associations  under 
the  banking  law  do  not  rightly  fall  zcithin  tlic  true  legal  interpretation 
of  the  restraining  elaitse  of  the  Constitution,  and  still  less  within  its 
spirit  and  design.'  This  is  far  enough  from  saying  that  the  free  banks, 
as  they  are  sometimes  called,  are  not  corporations  to  every  intent  and 
purpose  save  that  which  relates  to  the  mode  of  creating  them."     *     *     * 

"A  brief  reference  to  some  facts  which  do  not  appear  in  the  case  as 
reported,  will  serve  the  double  purpose  of  vindicating  the  court  against 
misconstructions  of  the  resolution,  and  showing  that  the  members  who 
voted  for  it  were  far  enough  from  intending  to  affirm  that  these  banks 
are  not  corporations.  On  the  day,  or  the  day  following  the  decision  of 
the  Court  for  the  Correction  of  Errors  in  the  case  of  Warner  v.  Beers, 
a  resolution  was  offered  by  Mr.  Senator  Verplanck,  affirming  in  direct 
and  unqualified  terms  that  these  associations,  'are  not  bodies  politic  or 
corporafc.'  Whether  the  mover  was  himself  prepared  to  vote  for  such 
a  resolution,  or  whether  it  was  only  offered  for  the  purpose  of  collecting 
the  sense  of  the  members  on  the  abstract  proposition  which  it  con- 
tained, I  am  unable_  to  say.  But  that  such  a  resolution  could  not  have 
Ijcen  passed,  is,  I  think,  quite  clear.  It  was  laid  on  the  table  by  common 
consent,  and  was  not  again  taken  up  until  thirteen  or  fourteen  days 
afterward.  When  the  consideration  of  the  resolution  was  again  resumed, 
it  was  innnediatcly  amended  by  unanimous  consent — the  ipover  himself, 
as  I  believe,  not  objecting  to  that  course — by  adding  the  very  significant 
words,  "within  the  spirit  and  meaning  of  the  Constitution;'  and  in  that 
form  it  was  adopted.  Now,  whatever  may  be  inferred  from  simply 
reading  the  resolution  as  it  finally  passed,  the  history  which  I  have  given 
of  its  original  form  and  subsequent  progress,  renders  it  impossible  to 
say,  that  any  member  who  voted  for  the  resolution  intended  to  deny 
that  these  associations  are  corporate  bodies.  In  confirmation  of  this 
remark,  I  may  add  the  further  fact,  which  does  not  appear  by  the  report, 
tliat  tile  Ciianccllor,  who  -fully  agreed  with  this  court  in  the  opinion  that 
these  l)anks  were  corporations,  voted  for  the  resolution  as  amended — 
indeed,  I  lielicve  the  amendment  was  proposed  by  him,  and  for  the 
avowed  purpose  of  meeting  the  views  of  those  who  agreed  with  him  in 
the  opinion  that  the  free  banks,  though  corporations,  were  not  such 
within  the  intent  and  meaning  of  the  Constitution." 

On  the  question- whether  associations  formed  under  the  act  were 
corporations  he  says  : 

"A  corporation  aggregate,  is  a  collection  of  individuals  united  in 
one  body,  under  such  a  grant  of  privileges  as  secures  a  succession  of 
members  without  changing  the  identity  of  the  body,  and  constitutes  the 
members  for  the  time  lieing  one  artificial  person,  or  legal  being,  capable 
of  transacting  some  kind  of  business  like  a  natural  person.  It  does  not 
occur  to  my  mind  that  anything  else  can  be  essential  to  the  definition. 
Such  a  union  as  I  have  mentioned,  can  only  be  effected  under  a  grant  of 
privileges  from  the  sovereign  power  of  the  State.  A  corporation  is 
therefore  said  to  be  a  legal  being,  or  the  mere  creature  of  law.  It  is 
convenient,  though  not  absolutely  necessary,  that  this  artificial  person, 
like  a  natural  one,  should  have  a  name  by  which  it  may  be  known  and 
designated  in  the  transaction  of  business.  And  when  tlie  doctrine  was, 
that  a  corporation  could  only  contract  Iiy  its  seal,  a  seal  was  said  to  be 
an  indispensable  requisite.  So,  immortality  was  once  thought  to  be  an 
attribute  of  all  corporations;  but  that  now  means  no  more  than  a  con- 
tinued succession  of  members  for  such  period,  wliether  long  or  short, 
as  may  be  allotted  to  this  legal  entity  by  its  creator. 


482  ELEMENTS  OF  FORMS  OF  ASSOCIATIOX 

"Xow,  a  banking  association  formed  under  the  law  of  1838.  not  only 
may,  but  it  must  have  a  name :  and  a  seal,  though  far  from  being  essen- 
tial to  the  existence  of  a  corporation,  is  nevertheless  an  incident  to  the 
grant  of  corporate  privileges,  though  not  mentioned  in  the  grant.  This 
is  not  only  so  at  the  common  law,  but  by  the  statute  also  (i  R.  S.  599, 
Sec.  i).  The  right  to  sue  and  be  sued  is  expressly  conferred  on  these 
associations;  and  whether  the  suit  is  brought  in  the  name  by  which  the 
company  transacts  its  other  business,  or  with  the  addition  of  the  name  of 
its  president,  cannot  be  material.  A  corporation  may  have  one  name  for 
one  purpose,  and  another  name  for  another  purpose.  And  besides,  the 
general  banking  law  only  provides,  that  action  may — not  that  they  sliall — 
be  brought  in  the  name  of,  or  against  the  president ;  and  the  right  to  sue 
and  be  sued,  like  that  of  having  a  common  seal,  is  not  only  a  common 
law  incident  to  the  grant  of  corporate  powers,  but  the  Legislature  has 
expressly  provided  that  this  power  shall  vest  in  every  corporation, 
although  not  specified  in  the  act  under  which  it  shall  be  incorporated 
(i  R.  S.  599,  Sees.  I.  2).  We  have  already  held,  more  than  once,  that 
these  associations  may  sue  or  be  sued  in  the  same  corporate  name  by 
which  their  other  business  is  transacted." 

The  question  of  the  nature  of  associations  organized  under  the 
Act  of  1838  came  again  before  the  Court  for  the  Correction  of  Errors 
in  the  case  of  Gilford  v.  Livingston,  2  Denio,  380  (1845).  The  following 
resolution  was  adopted :  "Resolved,  That  the  judgment  of  the  Supreme 
Court  is  reversed  on  the  ground  that  the  decision  of  this  court  in  the 
case  of  Warner  v.  Beers,  decided  that  the  law  entitled  'an  act  to  author- 
ize the  business  of  banking,'  passed  April  18,  1838,  is  valid  and  was 
constitutionally  enacted,  although  it  may  not  have  received  the  assent  of 
two-thirds  of  the  members  elected  to  each  branch  of  the  Legislature ; 
and  that  the  decision  in  that  case  is  conclusive." 

Seven  of  the  twenty-two  judges  voted  in  effect  against  this  resolution. 
There  are  two  opinions  reported,  one  by  Chancellor  Walworth  in  favor 
of  reversal  on  the  ground  that  Warner  v.  Beers  decided  what  Bronson, 
J.,  said,  in  The  People  v.  Assessors  of  Watertozcn,  supra,  that  it  did 
decide,  and  one  by  Senator  Hand,  to  the  effect  that  the  act  was  uncon- 
stitutional because  it  had  not  been  passed  by  a  two-thirds  vote,  and  the 
associations  formed  under  it  were  corporations. 


PEOPLE  ex  rei,  WINXHESTER  v.  COLEMAN,  et  al.       483 


THE  PEOPLE,  ex  rcl,  WINCHESTER  v.  COLEMAN, 
a  al.,  COALAHSSIONERS  OF  TAXES. 

In  the  Court  of  Appeals,  New  York,  1892. 

133  A'rti'  ]'ork  Apl^cals  Reports,  279. 

Appeal  from  order  of  the  general  term  of  the  Su- 
preme Court,  in  the  first  judicial  department,  made  Feb- 
ruary 13,  1891,  which  affirmed  a  judgment  in  favor  of 
plaintifif,  entered  upon  a  decision  of  the  Court  on  trial  at 
Special  Term,  vacating  an  assessment.^ 

Finch,  J. :  "fhe  relator  was  taxed  upon  its  capital  on 
the  ground  that  it  liad  become  a  corporation  within  the 
meaning  of  the  provision  of  the  Revised  Statutes  which 
enacts  that  "all  monied  or  stock  corporations  deriving  an 
income  or  i)r()fit  from  their  capital  or  otherwise,  shall  be 
liable  to  taxation  on  their  capital  in  the  manner  herein- 
after prescribed."  (  1  R.  vS.  title  4,  chap.  13,  part  i.)  The 
company  was  formed  as  a  joiwit  stock  company  or  associa- 
tion in  1853  by  a  written  agreement  of  eight  indi\-iduals 
with  each  other,  the  whole  force  and  effect  of  which,  in 
constituting  and  creating  the  organization,  rested  upon  the 
common  law  rights  of  the  individuals  and  their  power  to 
contract  with  each  other.  l"he  relation  they  assumed  was 
wholly  the  product  of  their  mutual  agreement  and  depend- 
ent in  no  respect  uixmi  the  grant  or  authority  of  the  state. 
It  was  entered  into  under  no  statutory  license  or  permis- 
sion, neither  acce])ting  nor  designed  to  accept  any  franchise 
from  the  sovereign,  but  founded  wholly  upon  the  individ- 
ual rights  of  the  associates  to  join  their  capital  and  enter- 
prise in  a  relation  similar  to  tliat  of  a  partnership.  A  few 
years  earlier  the  legislature  had  explicitly  recognized  the 
existence  and  validity  of  such  organizations,  founded  upon 


'The  facts  as  stated  by  tlic  Reporter  are  ablireviated.  and  his  notes 
of  the  arguments  of  counsel  omitted. 


484  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

contract  and  evolved  from  the  common  law  rights  of  the 
citizens.  (Laws  of  1849,  chap.  258.)  That  act  provided 
that  any  joint  stock  company  or  association,  which  con- 
sisted of  seven  or  more  members,  might  sue  or  be  sued  in 
the  name  of  its  president  or  treasurer,  and  with  the  same 
force  and  effect,  so  far  as  the  joint  property  and  rights 
were  concerned,  as  if  the  suit  should  be  prosecuted  in  the 
names  of  the  associates.  But  the  act  explicitly  disclaimed 
any  purpose  of  converting  the  joint  stock  associations  rec- 
ognized as  existing,  into  corporations  by  a  section  prohib- 
iting any  such  construction.  (Sec.  5.)  In  1851  the 
act  was  amended  in  its  form  and  application,  but  in  no  re- 
spect material  to  the  present  inquiry.  There  is  no  doubt, 
therefore,  that  when  the  company  was  formed  and  went 
into  operation  the  law  recognized  a  distinction  and  sub- 
stantial difference  between  joint  stock  companies  and  cor- 
porations and  never  confused  one  with  the  other,  and  that 
the  existing  statute  which  taxed  the  capital  of  corpora- 
tions had  no  reference  to  or  operation  upon  joint  stock 
companies  or  associations. 

But  two  things  have  since  occurred.  The  legislature, 
while  steadily  preserving  the  distinction  of  names,  has  with 
equal  persistence  confused  the  things  by  obliterating  sub- 
stantial and  characteristic  marks  of  difference,  until  it  is 
now  claimed  that  the  joint  stock  associations  have  grown 
into  and  become  corporations  by  force  of  the  continued  be- 
stowal upon  them  of  corporate  attributes.  It  is  said,  and 
very  probably  correctly  said,  that  the  legislature  may  create 
a  corporation,  without  explicitly  declaring  it  to  be  such, 
by  the  bestowal  of  a  corporate  franchise  or  corporate  attri- 
butes, and  the  cases  of  banking  associations  are  referred  to 
as  instances  of  actual  occurrence.  {Thomas  v.  Dakin,  22 
IVcnd.  9;  Bank  of  Watcrtoivn  v.  IVatcrtown,  25  Id.  686; 
People  V.  Niagara,  4  Hill,  20.)  It  is  added  that  such  re- 
sult may  happen  even  without  the  legislative  intent,  and 
because  the  gift  of  corporate  powers  and  attributes  is  tan- 
tamount to  a  corporate  creation.     It  is  then  asserted  that 


PEOPLE  ex  rcl..  WIXXH ESTER  i'.  COLEMAX.  ef  a!.       485 

a  series  of  statutes,  beginning  with  the  act  of  1849,  ^^^s 
ended  in  the  gift  to  joint  stock  associations  of  every  essen- 
tial attribute  possessed  by  and  characteristic  of  corpora- 
tions (Laws  of  1853,  chap.  153;  Laws  of  1854,  chap.  245; 
Laws  of  1867,  chap.  289)  ;  that  the  hues  of  distinction  be- 
tween the  two,  however  far  apart  in  the  beginning,  have 
steadily  converged  until  they  have  melted  into  each  other 
and  become  identical ;  that  every  distinguishing  mark  and 
characteristic  has  been  obliterated,  and  no  reason  remains 
why  joint  stock  associations  should  not  be  in  all  respects 
treated  and  regarded  as  corporations. 

Some  of  this  contention  is  true.  The  case  of  People 
ex  rel.  Piatt  v.  IVemple  (117  N.  Y.  136),  shows  very 
forcibly  how  almost  the  full  measure  of  corporate  attri- 
butes has,  by  legislative  enactment,  been  bestowed  upon 
joint  stock  associations,  until  the  difference,  if  there  be  one. 
is  obscure,  elusive  and  difficult  to  see  and  describe.  And 
yet  the  truth  remains  that  all  along  the  line  of  legislation 
the  distinctive  names  have  been  retained  as  indicative  and 
representative  of  a  difference  in  the  organizations  them- 
selves. As  recently  as  the  acts  of  1880  and  1881,  which 
formed  the  subject  of  consideration  in  the  Weinple  case, 
the  legislature,  dealing  with  the  subject  of  taxation  and 
desiring  to  tax  business  and  franchises,  imposed  the  liabil- 
ity upon  "every  corporation,  joint  stock  company  or  asso- 
ciation whatever  now  or  hereafter  incorporated  or  organ- 
ized under  any  law  of  this  state."  It  is  significant  that 
the  words  "or  organized"  were  inserted  by  amendment, 
and  evidently  for  the  understood  reason  that  joint  stock 
companies  could  not  properly  be  said  to  be  "incorporated," 
but  might  be  correctly  described  as  "organized"  under  the 
laws  of  the  state.  This  persistent  distinction  in  the  lan- 
guage of  the  statutes  I  should  not  be  inclined  to  disregard 
or  treat  as  of  no  practical  consequence,  when  seeking  to 
arrive  at  the  true  intent  and  proper  construction  of  the 
statute,  even  if  I  were  unable  to  discover  any  practical  or 
substantial  difference  between  the  two  classes  of  organiza- 


486  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

tions  upon  which  it  could  rest,  or  out  of  which  it  grew,  for 
the  distinction  so  seduonsly  and  persistently  observed 
would  strongly  indicate  the  legislative  intent,  and  so  the 
correct  construction. 

But  I  think  there  was  an  original  and  inherent  differ- 
ence between  the  corporate  and  joint  stock  companies 
known  to  our  law  which  legislation  has  somewhat  obscured, 
but  has  not  destroyed,  and  that  difference  is  the  one  pointed 
out  by  the  learned  counsel  for  the  respondent,  and  which 
impresses  me  as  logical  and  well  supported  by  authority. 
It  is  that  the  creation  of  the  corporation  merges  in  the 
artificial  body  and  drowns  in  it  the  individual  rights  and 
liabilities  of  the  members,  while  the  organization  of  a  joint 
stock  company  leaves  the  individual  rights  and  liabilities 
unimpaired  and  in  full  force.  The  idea  was  expressed  in 
Supervisors  of  Niagara  v.  People  (7  Hill,  512),  and  in 
Gifford  V.  Livingston  (2  Den.  380),  by  the  statement  that 
the  corporators  lost  their  individuality  and  merged  their 
individual  characters  into  one  artificial  existence;  and  upon 
these  authorities  a  corporation  is  defined  on  behalf  of  the 
respondents  to  l)e  "an  artificial  person  created  by  ,the  sover- 
eign from  natural  persons  and  in  which  artificial  person 
the  natural  persons  of  which  it  is  composed  become  merged 
and  non-existent."  I  am  conscious  that  legal  definitions 
invite  and  provoke  criticism,  because  the  instances  are  rare 
in  which  they  prove  to  be  perfectly  accurate ;  and  yet  this 
one  offered  to  us  may  be  accepted  if  it  successfully  bears 
some  sufficient  test.  In  putting  it  on  trial  we  may  take  the 
nature  of  the  individual  liability  of  the  corporators  on  the 
one  hand  and  of  the  associates  on  the  other,  for  the  debts 
contracted  ]jy  their  respective  organizations,  as  a  sufficient 
test  of  the  difference  between  them,  and  contrast  their  na- 
ture and  character. 

It  is  an  essential  and  inherent  characteristic  of  a  cor- 
poration that  it  alone  is  primarily  lial)le  for  its  debts,  be- 
cause it  alone  contracts  them,  except  as  that  natural  and 
necessary  consecjuence  of  its  creation  is  modified  in  the  act 


PEOPLE  ex  rel..  WINCHESTER  7'.  COLEMAN,  ef  al.      487 

of  its  creation  by  some  explicit  command  of  the  statute 
which  either  imposes  an  express  Habihty  upon  the  corpora- 
tors in  the  nature  of  a  penahy,  or  affirmatively  retains  and 
preserves  what  would  have  been  the  common  law  liability 
of  the  members  from  the  destruction  involved  in  the  cor- 
porate creation.  In  other  words,  the  individual  liability  of 
the  members,  as  it  would  have  existed  at  common  law,  is 
lost  by  their  creation  into  a  corporation,  and  exists  there- 
after only  by  force  of  the  statute,  upon  some  new  and  mod- 
ifying conditions,  to  some  partial  or  changed  extent,  and 
so  far  preventing,  by  the  intervention  of  an  express  com- 
mand, the  total  destruction  of  individual  liabilities  which 
otherwise  would  flow  from  the  inherent  effect  of  the  cor- 
porate creation.  The  penalties  sometimes  imposed  are  of 
course  new  statutory  liabilities  which  never  at  common  law 
rested  upon  the  individual  members.  The  retained  liabil- 
ity occasionally  established  is  in  the  nature  and  a  parcel  of 
such  original  liability,  as  we  had  occasion  to  show  in  Rogers 
v.  Decker  (131  N.  Y.  490),  but  is  retained  by  force  of  the 
express  command  of  the  statute  and  in  that  manner  saved 
from  the  destruction  which  otherwise  would  follow  the 
simple  creation  of  the  corporation.  Ordinarily,  these  indi- 
vidual liabilities  exist  upon  other  than  common  law  condi- 
tions, and  make  the  corporators  rather  sureties  or  guaran- 
tors of  the  corporation  than  original  delators,  since  in  gen- 
eral their  liability  arises  after  the  usual  remedies  against 
the  corporation  have  been  exhausted.  But  where  that  is 
not  so,  the  invariable  truth  is  that  the  creation  of  the  cor- 
poration necessarily  destroys  the  common  law  liability  of 
the  individual  members  for  its  debts,  and  requires  at  the 
hands  of  the  creating  power  an  affirmative  imposition  of 
new  personal  liabilities  or  a  specific  retention  of  old  ones 
from  the  destruction  which  would  otherwise  follow.  Ex- 
actly the  opposite  is  true  of  joint  stock  companies.  Their 
formation  destroys  no  part  or  portion  oi  their  common 
law  liability  for  the  debts  contracted.  Those  debts  are 
their  debts   for  which   they   must   answer.      Permission  to 


488  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

sue  their  president  or  treasurer  is  only  a  convenient  mode 
of  enforcing  that  habihty,  but  in  no  manner  creates  or 
saves  it.  The  statute  of  1853  did  interfere  with  it.  That 
act  required  in  the  first  instance  a  suit  against  the  presi- 
dent or  treasurer,  and  so  a  prehminary  exhaustion  of  the 
joint  property.  But  tliat  act  was  modal,  and  determined 
the  procedure.  It  suspended  the  common  law  right,  but 
recognized  its  existence.  We  so  held  in  WifJicrhcad  v.  AHcji 
(4  Abb.  Ct.  App.  Dec.  628),  and  at  the  said  time  said  that 
the  associations  were  not  corporations  but  mere  partner- 
ship concerns.  Even  that  mode  of  procedure  has  been  mod- 
ified by  the  Code  (Sees.  1922,  1923),  so  that  the  creditor 
at  his  option  may  sue  the  associates  without  bringing  his 
action  against  the  president  or  treasurer.  These  last  and 
quite  recent  enactments  show  that  the  legislative  intent  is 
still  to  preserve  and  not  destroy  the  original  difference  be- 
tween the  two  classes  of  organizations;  to  maintain  in  full 
force  the  common  law  liability  of  associates  and  not  to  sub- 
stitute for  it  that  of  corporators ;  and  preserving  in  contin- 
ued operation  that  normal  and  distinctive  difference,  to 
evince  a  plain  purpose  not  to  merge  the  two  organizations 
in  one  or  destroy  the  boundaries  which  separate  them. 
That  intent,  once  clearly  ascertained,  determines  the  con- 
struction to  be  adopted,  and  may  be  the  only  reliable  test 
in  view  of  the  power  of  the  state  to  clothe  one  organiza- 
tion with  all  the  attributes  of  the  other.  The  drift  of  leg- 
islation has  been  to  lessen  and  obscure  the  original  and 
characteristic  difference.  On  the  one  hand  corporations 
have  been  created  with  positive  provisions  retaining  more 
or  less  the  individual  liability  of  the  members,  and  on  the 
other  the  joint  stock  companies  have  been  clothed  with 
most  of  the  corporate  attributes.  l)ut  enough  of  the  orig- 
inal difference  remains  to  show  that  our  legislation,  not 
only  carefully  preserves  the  distinction  of  names,  but  suffi- 
cient, also,  of  the  original  difference  of  character  and  qual- 
ity to  disclose  a  clear  intent  not  to  merge  the  two. 

We  may  thus  see  upon  what  the  legislative  intent  to 


PEOPLE  ex  rel.,  WINCHESTER  v.  COLEMAN,  et  al.       489 

preserve  them  as  separate  and  distinct  is  founded  and  what 
distinguishing  characteristics  remain.  The  formation  of 
the  one  involves  the  merging  and  destruction  of  the  com- 
mon law  Habihty  of  the  members  for  the  debts,  and  requires 
the  substitution  of  a  new  or  retention  of  the  old  liability 
by  an  affirmative  enactment  which  avoids  the  inherent  ef- 
fect of  the  corporate  creation ;  in  the  other,  the  common 
law  liabihty  remains  unchanged  and  unimjiaired  and  need- 
ing no  statutory  intervention  to  preserve  or  restore  it;  the 
debt  of  the  corporation  is  its  debt  and  not  that  of  its  mem- 
bers, the  debt  of  the  joint  stock  company  is  the  debt  of  the 
associates  however  enforced ;  the  creation  of  the  corpora- 
tion merges  and  drowns  the  liability  of  its  corporators,  the 
creation  of  the  stock  company  leaves  unharmed  and  un- 
changed the  liability  of  the  associates ;  the  one  derives  its 
existence  from  the  contract  of  individuals,  the  other  from 
the  sovereignty  of  the  state.  The  two  are  alike  but  not  the 
same.  More  or  less,  they  crowd  upon  and  overlap  each 
other,  but  without  losing  their  identity,  and  so,  while  we 
cannot  say  that  the  joint  stock  company  is  a  corporation, 
we  can  say  as  we  did  say  in  Van  Aeniam  v.  Blcistcin  (102 
N.  Y.  360),  that  a  joint  stock  company  is  a  partnership 
with  some  of  the  powers  of  a  corporation.  Beyond  that 
we  do  not  think  it  is  our  duty  to  go. 

The  order  should  be  affirmed,  with  costs.     All  concur. 
Order  affirmed. 


490  ELEMENTS  OF  FORMS  OF  ASSOCIATION 


LIVERPOOL  INSURANCE  CO.  v. 
MASSACHUSETTS. 

In  the  Supreme  Court  of  the  United  States,  1870. 

yy  United  States  Reports,  566. 

Error  to  the  Supreme  Judicial  Court  of  Massachu- 
setts ;  the  case  being  this : 

A  statute  of  the  State  just  named  imposes  upon  "each 
fire,  marine,  and  fire  and  marine  insurance  company,  incor- 
porated or  associated  under  the  laws  of  any  government  or 
State  other  than  one  of  the  United  States,  a  tax  of  4  per 
cent,  upon  all  premiums  charged  or  received  on  contracts 
made  in  this  commonwealth  for  insurance  of  property." 
Tiie  same  statute  imposes  a  tax  of  but  2  per  cent,  upon  such 
premiums  when  the  company  is  incorporated  under  the  laws 
of  any  one  of  the  United  States  other  than  Massachusetts; 
upon  which  premiums,  where  the  company  is  incorporated 
by  itself,  it  imposes  but  i  per  cent. ;  while  no  tax  is  imposed 
by  the  laws  of  the  State  upon  the  business  of  insurances 
transacted  by  any  natural  persons  citizens  of  the  same. 

With  the  enactment  just  mentioned  on  its  statute  book, 
the  State  of  Massachusetts,  in  1868,  filed  a  bill  in  its  Su- 
preme Judicial  Court  against  the  Liverpool  and  London 
Life  and  Fire  Insurance  Company  (a  company  doing  a  large 
business  in  that  State),  to  collect  a  tax  of  4  per  cent,  on  its 
premiums  upon  contracts  made  in  Massachusetts  for  insur- 
ance of  property,  and  to  restrain  the  company  from  doing 
further  business  till  the  tax  was  paid.  The  company  set  up 
that  it  was  not  "incorporated"  at  all,  but  was  an  association, 
under  the  laws  of  Great  Britain,  of  natural  persons,  some 
of  whom  were  citizens  and  residents  of  the  country  just 
named ;  and  some  citizens  and  residents  of  the  State  of  New 
York ;  formed  for  the  purpose  of  conducting  the  business  of 
insurance  under  certain  deeds  of  settlement,  and  having  the 


LIVERPOOL  INSURANCE  CO.  v.  MASSACHUSETTS     491 

legal  character  of  a  partnership ;  that  accordingly  it  could 
not  be  taxed  as  a  "company  incorporated  under  the  laws  of 
any  government  or  State  other  than  one  of  the  United 
States;"  while,  in  so  far  as  the  discriminating  tax  of  4  per 
cent,  was  sought  to  be  laid  against  it  as  a  company  associ- 
ated simply  and  not  incorporated,  it  violated,  in  regard  to 
the  members  of  the  company  who  were  subjects  of  Great 
Britain,  a  provision  in  the  treaty  of  181 5,  between  that 
counti-y  and  the  United  States,  by  which  it  is  agreed  that 
the  merchants  and  traders  of  each  nation  respectively  shall 
enjoy  the  most  complete  protection  and  security  for  their 
commerce:  and — in  regard  to  the  citizens  of  New  York, 
that  provision  in  section  2,  article  4,  of  the  Federal  Con- 
stitution which  secures  to  the  citizens  of  each  State  all  the 
privileges  and  immunities  of  citizens  in  the  several  States. 

The  Supreme  Judicial  Court  of  Massachusetts  gave  a 
decree  against  the  company,  and  enjoined  it  from  the  fur- 
ther prosecution  of  its  business  till  the  taxes  found  to  be 
due  were  paid. 

The  case  was  now  brought  to  this  court  on  the  ground 
that  in  its  application  to  the  company  the  statute  of  Massa- 
chusetts was  in  conflict  with  the  provision  of  the  Constitu- 
tion, which  confers  on  Congress  the  right  to  regulate  com- 
merce with  foreign  nations  and  among  the  States,  and  with 
that  which  secures  to  the  citizens  of  each  State  all  the  privi- 
leges and  immunities  of  citizens  in  the  several  States.^ 

Mr.  Justice  Miller  delivered  the  opinion  of  the  Court. 

The  case  of  Paul  v.  Jlrginia  [8  Wallace,  168],  de- 
cided that  the  business  of  insurance,  as  ordinarily  con- 
ducted, was  not  commerce,  and  that  a  corporation  of  one 
State,  having  an  agency  by  which  it  conducted  that  business 
in  another  State,  was  not  engaged  in  commerce  between  the 
States. 

It  was  also  held  in  that  case  that  a  corporation  was  not 
a  citizen  within  the  meaning  of  that  clause  of  the  Consti- 


^  The  facts  of  the  case  as  stated  by  the  Reporter  have  been  abbrevi- 
ated, and  his  notes  of  the  arguments  of  counsel  omitted. 


492  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

tution,  which  declares  that  the  citizens  of  each  State  shall 
be  entitled  to  all  the  privileges  and  immnnities  of  citizens 
in  the  several  States,  and  that  a  corporation  created  by  a 
State  could  exercise  none  of  the  functions  or  privileges  con- 
ferred by  its  charter  in  any  other  State  of  the  Union,  ex- 
cept by  the  comity  and  consent  of  the  latter. 

These  propositions  dispose  of  the  case  before  us,  if 
plaintiff  is  a  foreign  corporation,  and  was,  as  such,  con- 
ducting business  in  the  State  of  Massachusetts,  and  we  pro- 
ceed to  inquire  into  its  character  in  this  regard. 

The  institution  now  known  as  the  Liverpool  and  Lon- 
don Life  and  Fire  Insurance  Company,  doing  an  immense 
business  in  England  and  in  this  country,  was  first  organized 
at  Liverpool  by  what  is  there  called  a  deed  of  settlement, 
and  would  here  be  called  articles  of  association. 

It  will  be  seen  by  reference  to  the  powers  of  the  asso- 
ciation, as  organized  under  the  deed  of  settlement,  legalized 
and  enlarged  by  the  acts  of  Parliament,  that  it  possesses 
many,  if  not  all,  the  attributes  generally  found  in  corpora- 
tions for  pecuniary  profit  which  are  deemed  essential  to 
their  corporate  character. 

1.  It  has  a  distinctive  and  artificial  name  by  which  it 
can  make  contracts. 

2.  It  has  a  statutory  provision  by  which  it  can  sue  and 
be  sued  in  the  name  of  one  of  its  oificers  as  the  representa- 
tive of  the  whole  body,  which  is  bound  by  the  judgment 
rendered  in  such  suit. 

3.  It  has  provision  for  perpetual  succession  by  the 
transfer  and  transmission  of  the  shares  of  its  capital  stock, 
whereby  new  members  are  introduced  in  place  of  those  who 
die  or  sell  out. 

4.  Its  existence  as  an  entity  apart  from  the  sharehold- 
ers is  recognized  by  the  act  of  Parliament  which  enables  it 
to  sue  its  shareholders  and  be  sued  by  them.     *     *     * 

To  this  view  [that  the  association  is  a  corporation]  it 
is  objected  that  the  association  is  nothing  but  a  partnership, 
because  its  members  are  liable  individually  for  the  debts  of 


LIVERPOOL  INSURANCE  CO.  z:  MASSACHUSETTS     493 

the  company.  But  however  the  law  on  this  subject  may  be 
held  in  England,  it  is  quite  certain  that  the  principle  of  per- 
sonal liability  of  the  shareholders  attaches  to  a  very  large 
proportion  of  the  corporations  of  this  country,  and  it  is  a 
principle  which  has  warm  advocates  for  its  universal  appli- 
cation when  the  organization  is  for  pecuniary  gain. 

So  also  it  is  said  that  the  fact  that  there  is  no  provi- 
sion either  in  the  deed  of  settlement  or  the  act  of  Parlia- 
ment for  the  company  suing  or  being  sued  in  its  artificial 
name  forbids  the  corporate  idea.  But  we  see  no  real  dis- 
tinction in  this  respect  between  an  act  of  Parliament,  which 
authorized  suits  in  the  name  of  the  Liverpool  and  London 
Fire  and  Life  Lisurance  Company,  and  that  which  author- 
ized suit  against  that  company  in  the  name  of  its  principal 
officer.  If  it  can  contract  in  the  artificial  name  and  sue  and 
be  sued  in  the  name  of  its  officers  on  those  contracts,  it  is  in 
effect  the  same,  for  process  would  have  to  be  served  on 
some  such  officer  even  if  the  suit  were  in  the  artificial 
name. 

It  is  also  urged  that  the  several  acts  of  Parliament  we 
have  mentioned  expressly  declare  that  they  shall  not  be  held 
to  constitute  the  body  a  corporation. 

But  whatever  may  be  the  effect  of  such  a  declaration 
in  the  courts  of  that  country,  it  cannot  alter  the  essential 
nature  of  a  corporation  or  prevent  the  courts  of  another 
jurisdiction  from  inquiring  into  its  true  character,  when- 
ever that  may  come  in  issue.  It  appears  to  have  been  the 
policy  of  the  English  law  to  attach  certain  consequences  to 
incorporated  bodies,  which  rendered  it  desirable  that  such 
associations  as  these  should  not  become  technically  corpora- 
tions. Among  these,  it  would  seem  from  the  provisions  of 
these  acts,  is  the  exemption  from  individual  liability  of  the 
shareholder  for  the  contracts  of  the  corporation.  Such  lo- 
cal policy  can  have  no  place  here  in  determining  whether 
an  association,  whose  powers  are  ascertained  and  its  privi- 
leges conferred  by  law,  is  an  incorporated  body. 

The  question  before  us  is  whether  an  association,  such 


494  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

as  the  one  we  are  considering,  in  attempting  to  carry  on  its 
business  in  a  manner  wliich  requires  corporate  powers  un- 
der legislative  sanction,  can  claim,  in  a  jurisdiction  foreign 
to  the  one  which  gave  those  powers,  that  it  is  only  a  part- 
nership of  individuals. 

We  have  no  hesitation  in  holding  that,  as  the  law  of 
corporations  is  understood  in  this  country,  the  association 
is  a  corporation,  and  that  the  law  of  Massachusetts,  which 
only  permits  it  to  exercise  its  corporate  function  in  that 
State  on  the  condition  of  payment  of  a  specific  tax,  is  no 
violation  of  the  Federal  Constitution  or  of  any  treaty  pro- 
tected by  said  Constitution. 

Mr.  Justice  Bradley  : 

Whilst  I  agree  in  the  result  which  the  court  has 
reached,  I  differ  from  it  on  the  question  whether  the  com- 
pany is  a  corporation.  I  think  it  is  one  of  those  special 
partnerships  which  are  called  joint  stock  companies,  well 
known  in  England  for  nearly  a  century,  and  cannot  main- 
tain an  action  or  be  sued  as  a  corporation  in  this  country 
without  legislative  aid.  But  as  it  is  a  company  associated 
under  the  laws  of  a  foreign  country,  it  comes  within  the 
scope  of  the  Massachusetts  statute,  and  cannot  claim  ex- 
emption from  its  operation  for  the  causes  alleged  in  that 
behalf.  It  could  not  have  been  the  intent  of  the  treaty  of 
1815  to  prevent  the  States  from  imposing  taxes  or  license 
laws  upon  either  British  corporations  or  joint  stock  com- 
panies desiring  to  establish  banking  or  insurance  business 
therein.  And  certainly  these  companies  cannot  be  ex- 
empted from  such  laws  on  the  ground  that  citizens  of  other 
States  have  chosen  to  take  some  of  their  shares. 

Judgment  affirmed. 


I 


OAK  RIDGE  COAL  CO.  v.  ROGERS  495 


OAK  RIDGE  COAL  CO.  v.  ROGERS. 
In  the  Supreme  Court  of  Pennsylvania^  1884. 

108  Pennsylvania  Reports,  147. 

Chief  Justice  Mercur:^  This  action  of  trespass  was 
brought  under  Section  i  of  the  Act  of  8th  May,  1876:  Pur. 
Ami.  Dig.  2000,  pi.  9.  The  section  consists  of  two  parts. 
The  first  part  declares  if  any  person  or  corporation  shall 
mine  or  dig  out  any  coal,  iron  or  other  minerals,  knowing 
the  same  to  be  upon  the  lands  of  another  person  or  corpora- 
tion without  the  consent  of  the  owner,  the  person  or  cor- 
poration so  offending  shall  be  guilty  of  a  misdemeanor,  and 
on  conviction  thereof  shall  be  fined  or  imprisoned,  as  therein 
provided.  The  other  part  proceeds:  "And  the  person  or 
corporation  so  offending  shall  be  further  liable  to  pay  to 
such  owner  double  the  value  of  said  coal,  iron  or  other  ma- 
terials so  mined,  dug  out  or  removed,  or  in  case  of  the  con- 
version of  the  same  to  the  use  of  such  offender  or  offenders, 
treljle  the  value  thereof,  to  be  recovered,  with  costs  of  suit, 
by  action  of  trespass  or  trover,  as  the  case  may  be ;  and  no 
prosecution  by  indictment  under  this  Act  shall  be  a  bar  to 
such  action." 

Theclaim  was  for  both  double  and  treble  damages,  under 
the  second  portion  of  the  section.  No  question  therefore 
arises  as  to  the  character  or  degree  of  proof  necessary  to 
convict  on  an  indictment. 

The  plaintiff  in  error  contends  that  it  is  neither  a  per- 
son nor  a  corporation  within  the  meaning  of  the  Act  of  1876, 
and  therefore  not  subject  to  the  penalties  and  liabilities  pre- 
scribed thereby.     The  fact  relied  on  to  support  this  view  is 


*  The  Reporter's  statement  of  the  facts  of  the  case,  and  his  notes  of 
the  argument  of  counsel  are  omitted.  Only  so  much  of  the  opinion  is 
reprinted  as  relates  to  the  nature  of  a  limited  partnership  under  the 
Act  of  June  2nd,  1874. 


496  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

that  it  is  an  association  formed  under  the  Act  of  2d  June, 
1874,  which  provides  for  the  formation  of  hmited  partner- 
ships. 

Such  an  association  is  not  technically  a  corporation. 
Yet  it  has  many  of  the  characteristics  of  one.  It  can  sue  and 
he  sued  in  its  association  name  only.  The  longest  period  of  its 
duration  is  fixed  l)y  the  Act  which  provides  for  its  existence. 
Like  most  corporations  its  capital  (except  in  certain  cases 
designated  by  the  Act )  is  alone  liable  for  its  debts.  The 
making  of  any  division  of  profits  which  shall  at  the  time 
diminish  or  impair  the  capital  of  the  association  is  prohib- 
ited, and  a  personal  liability  is  imposed  on  any  manager 
consenting  thereto.  The  omission  to  use  the  word  "limited" 
may  make  each  person  participating  therein  personally  liable 
for  any  indebtedness  arising  on  writings  executed  and  used 
in  the  transaction  of  its  business.  The  Act  further  provides 
for  a  dissolution  of  the  association,  for  w-inding  up  its  bus- 
iness, and  for  the  distribution  of  its  property.  It  may  not 
be  improper  to  call  such  an  association  a  quasi  corporation. 
If  not  a  corporation,  it  is  a  person.  It  is  either  a  natural  or 
an  artificial  person.  There  is  no  intermediate  place  for  it 
to  occupy,  no  other  n.ame  for  it  to  bear.  It  cannot  claim 
an  existence  which  exempts  it  from  all  liabilities  imposed  on 
either  class  of  persons.  In  law  the  main  division  of  persons 
is  between  natural  and  artificial  persons.  The  latter  class 
are  corporations.  Hence  it  is  said  in  Sedgwick  on  Statutes, 
372,  the  word  '.'persons"  includes  artificial  persons,  corpora- 
tions and  quasi  corporations.  So  it  is  declared  in  Potter's 
Dzvarris,  283,  that  although  parishes  are  neither  bodies  pol- 
itic nor  corporate  or  persons,  yet  the  words  every  body  pol- 
itic or  corporate,  and  person  or  persons,  extend  to  and  in- 
cludes parishes. 

The  argument  of  the  plaintiff  in  error,  if  sound,  proves 
too  much.  If  it  is  neither  a  person  nor  a  corporation,  for 
purposes  of  liability  under  the  Act  of  1876,  it  is  not  under 
the  Act  for  the  purpose  of  protecting  its  ow'n  property  and 
for  the  recovery  of  damages  for  injury  done  thereto.     The 


OAK  RIDGE  COAL  CO.  v.  ROGERS  497 

same  language  applied  to  the  wrongdoer  applies  to  the  party 
injured.  It  is  if  "any  person  or  corporation"  shall  commit 
the  illegal  acts  named  "upon  the  lands  of  another  person  or 
corporation." 

It  cannot  be  that  this  statute  has  no  application  to  such 
an  association.  We  are  clearly  of  the  opinion  that  the  lan- 
guage is  sufficiently  broad  to  subject  it  to  the  penalties 
therein  imposed,  and  to  give  it  the  rights  thereby  secured. 

Judgment  affirmed. 


498  ELEMENTS  OF  FORMS  OF  ASSOCIATION 


EDWARDS  z:  WARREN  LINOLINE  AND  GASOLINE 

WORKS. 

In  the  Supreme  Judicial  Court  of  Massachusetts, 

1897. 

168  Massachusetts  Reports,  564. 

Trustee  process.  The  principal  defendant  was  de- 
scribed in  the  writ  as  "a  joint  stock  company  organized  un- 
der the  laws  of  Pennsylvania."  The  trustee,  which  was  a 
Massachusetts  corporation,  filed  an  answer  setting  forth 
reasons  why  it  should  not  be  charged,  and  to  interrogatories 
propounded  by  the  plaintiff,  made  answers,  the  nature  of 
which  appears  in  the  opinion.  The  trustee  moved  that  it  be 
discharged.  The  Superior  Court  allowed  the  motion,  dis- 
charged the  trustee  with  costs,  and  dismissed  the  action ; 
and  the  plaintiff  appealed  to  this  court. 

The  case  was  argued  at  the  bar  in  November,  1896, 
and  afterwards  was  submitted  on  briefs  to  all  the  justices. 

Lathrop,  J. :  It  is  conceded  by  the  plaintiff,  that,  as  the 
jurisdiction  of  the  court  depends  upon  charging  the  Wal- 
worth Manufacturing  Company  as  trustee,  inasnuich  as 
there  was  no  service  upon  the  principal  defendant,  the  action 
was  properly  dismissed  upon  discharging  the  trustee. 

The  question  then  is  whether  the  trustee  was  properly 
discharged,  and  this  depends  upon  whether  the  principal  de- 
fendant, an  association  formed  under  the  laws  of  the  State 
of  Pennsylvania,  is  a  partnership  or  a  corporation. 

The  trustee's  answers  to  interrogatories  refer  to  Bright- 
ly s  Piirdons  Digest  (12th  ed. ),  1086-1088,  and  to  the  cases 
of  Eliot  V.  Himrod,  108  Penn.  St.  569,  and  Shcblc  v.  Strong, 
128  Penn.  St.  315,  as  containing  the  law  relative  to  the 
statement  in  the  answer,  that  the  principal  defendant  was 
a  partnership,  and  not  a  corporation. 

From  the  Digest  it  appears  that  such  an  associaticMi  is 


EDWARDS  z'.  WARREN  LINOLINE,  &c.,  WORKS      499 

styled  a  "partnership  association,"  and  not  a  corporation. 
By  the  terms  of  tiie  various  acts  which  have  been  passed 
upon  the  subject,  such  an  association  may  be  formed  by 
three  or  more  persons.  The  capital  is  alone  to  be  liable^for 
the  debts.  There  is  no  personal  liability  of  the  members, 
except  to  the  extent  of  any  unpaid  subscription,  if  certain 
provisions  of  the  act  are  complied  with.  "Interests  in  such 
partnership  associations"  are  declared  to  be  personal  estate, 
and  are  transferable,  under  such  rules  and  regulations  as 
shall  from  time  to  time  be  prescribed;  but  if  there  are  no 
such  rules  and  regulations,  the  transferee  of  any  interest  in 
any  such  association  is  not  entitled  to  any  participation  in  the 
subsequent  business  of  the  association,  unless  elected  to  mem- 
bership therein  by  a  vote  of  the  majority  of  the  members 
in  number  and  value  of  their  interests.  The  business  is  to 
be  conducted  by  a  board  of  managers.  The  duration  of  the 
association  may  be  fixed  by  the  articles  of  association,  but 
is  not  to  exceed  twenty  years. 

Power  to  adopt  and  use  a  common  seal  is  given  in  case 
the  association  has  occasion  to  execute  a  deed  of  conveyance 
or  1)onds  and  mortgages.  Land  sold  to  the  association,  or 
by  it,  is  required  to  be  conveyed  in  the  name  of  the  associa- 
tion. It  is  further  provided:  "Said  association  shall  sue 
and  be  sued  in  their  association  name ;  and  when  suit  is 
brought  against  any  such  association,  service  thereof  shall 
be  macle  upon  the  chairman,  secretary,  or  treasurer  thereof ; 
which  service  shall  be  as  complete  and  eifective  as  if  made 
upon  each  and  every  meml)er  of  such  association." 

In  Eliot  V.  Hiuirod,  io8  Penn.  St.  569,  580,  it  is  said 
by  Mr.  Justice  Trunkey,  in  delivering  the  opinion  of  the 
court :  "The  formation  of  a  limited  partnership  association 
is  materially  different  from  the  creation  of  a  corporation. 
Such  association  is  treated  in  the  statute  as  a  partnership 
which,  upon  the  perf(M-mance  of  certain  acts,  shall  possess 
specified  rights  and  immunities.  In  contemplation  that  the 
association  may  consist  of  man}^  members,  for  con\^enience 
it  is  clothed  with  many  of  the  features  and  powers  of  a  cor- 


SnO  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

poration,  such  as  the  right  to  sue  and  he  sued,  grant  and  re- 
ceive, in  the  association  name.  But  no  man  can  purchase 
the  interest  of  a  member  and  participate  in  the  subsequent 
business,  unless  by  a  vote  of  a  majority  of  the  members  in 
number  and  value  of  their  interests.  No  charter  is  granted 
to  the  persons  who  record  their  statement."  Shcblc  v. 
Strong,  128  Penn.  St.  315,  318,  is  to  the  same  effect. 

If  the  question  presented  were  an  open  one  in  this  Com- 
monwealth, it  might  well  be  held  that  such  an  association 
could  be  considered  to  have  so  many  of  the  characteristics  of 
a  corporation  that  it  might  be  treated  as  one. 

At  common  law,  a  joint  stock  company  formed  for  bus- 
iness purposes  is  considered  in  this  Commonwealth  merely 
as  a  partnership.  Tappan  v.  Bailey,  4  Met.  529.  Tyrrell  v. 
Washburn',  6  Allen,  466. 

The  same  rule  has  been  applied  to  joint  stock  associa- 
tions formed  under  the  laws  of  the  State  of  New  York, 
which  do  not  differ,  in  any  essential  respect,  from  the  laws 
of  Pennsylvania.  Taft  v.  Ward,  106  Mass.  518,  and  11 1 
Mass.  518.  Boihvell  v.  Eastman,  106  Mass.  525,  526.  Gott 
V.  Dinsnwre,  iii  Mass.  45,  51.  Boston  &  Albany  Railroad 
V.  Pearson,  128  Mass.  445.  See  also  Frost  v.  Walker,  60 
Maine,  468;  Dinsniorc  v  Philadelphia  &  Reading  Railroad, 
32  Leg.  Int.  388,  1 1  Phila.  483. 

In  Taft  V.  Ward,  106  Mass.  518,  524,  speaking  of  the 
New  York  statutes,  it  was  said  by  Chief  Justice  Chapman : 

"These  statutes  provide,  in  substance,  that  any  associa- 
tion, consisting  of  seven  or  more  shareholders  or  associates, 
may  sue  and  be  sued  in  the  name  of  the  president  or  treas- 
urer; that  in  such  suit  a  judgment  may  be  rendered  against 
the  company ;  and  until  an  execution  is  issued  against  the 
company,  and  returned  unsatisfied,  no  action  shall  be  main- 
tained against  individuals.  These  statutes  seem  to  apply  to 
all  copartnerships  consisting  of  seven  or  more  members.  The 
members  of  such  companies  are  authorized  to  hold  their  in- 
terests in  shares,  which  are  assignable  like  shares  of  stock 
in  a  corporation,  and  the  action  against  the  members  is  re- 


EDWARDS  7:  WARREN  LINOLINE,  S:c.,  WORKS       501 

garded  as  supplementary  to  the  action  against  the  company. 
VVatcrhury  v.  Mcrclianfs'  Union  Express  Co.  50  Barb.  157. 
Robbins  v.  Wells,  1  Robertson,  666. 

"So  far  as  these  statutes  relate  to  the  procedure  in 
courts  for  the  recovery  of  debts,  they  are  limited  to  the 
State  of  New  York ;  for  each  State  adopts  its  own  forms 
of  remedy.  Story,  Coiifl.  Lazvs,  Sees.  556-558.  The  plain- 
tiff could  not  in  this  Commonwealth  bring  an  action  against 
the  president  or  secretary,  and  obtain  a  judgment  against 
the  company  by  its  name ;  nor  could  he  ])ring  an  action 
against  the  members,  or  any  of  them,  as  a  supplement  to 
such  an  action.  In  order  to  do  so,  we  must  hold  that  the 
statutes  of  New  York  prescribing  forms  of  action  are  in 
force  here.  In  this  Commonwealth,  such  a  company  is  a 
mere  copartnership." 

There  is  nothing  inconsistent  with  an  association  being 
a  partnership  that  it  has  shares,  or  that  the  shares  are  trans- 
ferable, or  that  the  death  of  a  member  shall  not  work  a  dis- 
solution of  the  partnership.  Phillips  v.  Blatchford,  137 
Mass.  510.  See  also  Hoadlcy  v.  County  Commissioners,  105 
Mass.  519;  Gleason  v.  McKay,  134  Mass.  419. 

The  case  mostly  relied  upon  by  the  plaintiff  is  Liver- 
pool Ins.  Co.  V.  Mossachusetts,  10  Wall.  566,  which  was 
taken  to  the  Supreme  Court  of  the  United  States  on  a  writ 
of  error  from  this  court.      *     *     *  ^ 

This  view  of  Mr.  Justice  Bradley  is  in  accord  with 
the  view  of  this  court,  and  we  are  not  aware  that  the  view 
taken  by  the  Supreme  Court  of  the  United  States  has  been 
followed  in  this  Commonwealth.  The  decisions  which  we 
have  already  cited  show  that  a  foreign  joint  stock  companv 
is  considered  as  an  association  or  partnership,  and  not  as  a 
corporation. 

An  examination  of  the  statutes  further  shows  that  the 
Legislature  has  clearly  recognized  the  distinction  between 
foreign  corporations  and  associations ;  and  that  where  it  has 

'Judge  Lathrop's  recital  of  the  facts  of  this  case  is  omitted.     See 
supra,  page  498. 


502  ELEMENTS  OF  FORMS  OF  ASSOCIATION 

deemed  it  Ijest  that  an  act  should  apply  to  an  association  as 
well  as  to  a  corporation,  it  has  said  so  in  plain  language. 
Thus  the  St.  of  1882,  c.  106,  relating  to  the  taxation  of  for- 
eign mining,  quarrying,  and  oil  companies,  and  recjuiring 
the  appointment  of  an  agent  here  upon  whom  process  may 
be  served,  uses  the  language,  "every  corporation,  company, 
or  association." 

The  St.  of  1887,  c.  214,  in  Sec.  i  provides:  "When 
consistent  with  the  context,  and  not  obviously  used  in  a  dif- 
ferent sense,  the  term  'company'  or  'insurance  company'  as 
used  herein  includes  all  corporations,  associations,  partner- 
ships, or  individuals  engaged  as  principals  in  the  business  of 
insurance."  The  language  is  the  same  in  the  St.  of  1894, 
c.  522,  Sec.  I. 

By  the  St.  of  1888,  c.  429,  Sec.  11,  "fraternal  benefic- 
iary corporations,  associations,  or  societies,"  organized  under 
the  laws  of  another  State  and  then  doing  business  here,  were 
allowed  to  continue  business  without  incorporation  under 
the  act.  But  by  the  St.  of  1892,  c.  40,  Sec.  i,  this  was 
amended  by  striking  out  the  words  "associations  or  soci- 
eties." 

The  St.  of  1884,  c.  330,  recjuires  "Every  corporation 
established  under  the  laws  of  any  other  State  or  foreign 
country,"  and  hereafter  having  a  usual  place  of  business 
here,  before  doing  business,  to  appoint  in  writing  the  com- 
missioner of  corporations,  or  his  successor  in  office,  to  be  its 
true  and  lawful  attorney,  upon  whom  process  might  be 
served. 

The  St.  of  1888,  c.  321,  allows  "Manufacturing  cor- 
porations established  under  the  laws  of  other  States,"  which 
have  complied  with  the  provisions  of  the  St.  of  1884,  c.  330, 
to  purchase  and  hold  such  real  estate  here  as  may  be  neces- 
sary for  conducting  their  business. 

By  the  St.  of  1895,  c.  311,  "Foreign  corporations  en- 
gaged in  the  l)usiness  of  selling  or  negotiating  bonds,  mort- 
gages, notes,  or  other  choses  in  action,"  are  made  subject  to 
the  provisions  of  the  St.  of  1884,  c.  330. 


I 


EDWARDS  r.  WARREN  LIXOLINE,  &c.,  WORKS       503 

The  St.  of  1896,  c.  391,  Sec.  i,  contains  a  provision  re- 
lating to  the  personal  liability,  under  certain  circumstances, 
of  "the  officers  and  members  or  stockholders  in  any  corpo- 
ration established  under  the  laws  of  any  other  State  or  for- 
eign country."  See  also  St.  1895,  ^-  i57- 

Many  other  instances  of  legislation  might  be  given 
where  the  distinction  between  a  corporation  proper  and  a 
mere  association  or  organization  is  shown  to  be  clearly  in 
mind. 

Unless  the  principal  defendant  can  be  considered  a  cor- 
poration, it  cannot  be  sued  here  under  the  name  which  the 
laws  of  Pennsylvania  authorize  it  to  use.  Such  laws  have  no 
extra-territorial  force  or  effect.  The  trustee,  therefore,  was 
properly  discharged. 

In  the  opinion  of  a  majority  of  the  court,  the  order  dis- 
charging the  trustee  and  dismissing  the  action  must  be 
affirmed. 


CHAPTER    IX 


NATURE  OF  THE  INTERESTS  OF  THE  AS- 
SOCIATES IN  THE  COMMON  PROPERTY. 


SECTION  I.— PARTNERSHIP  CASES. 


DARBY  7'.  DARBY. 

In  the  High  Court  of  Chancery,  1856,  before  Vice- 
Chancellor  Kindersley. 

3  Drczvry's  Reports,  495. 

Alfred  Darby,  the  father  of  the  three  infant  Defend- 
ants, died  intestate.  A.  E.  W.  Darby,  the  first  Defendant 
on  the  record,  was  his  only  son  and  heir-at-law.  The  De- 
fendants A.  M.  Darby  and  A.  L.  Darby  were  his  two  daugh- 
ters and  only  other  children. 

This  bill  was  filed  by  the  administratrix  of  Alfred 
Darby  for  the  administration  of  his  estate,  and  the  principal 
cjuestion  was,  what  was  the  course  of  devolution  of  certain 
real  estate  belonging  to  Alfred  Darby. 

The  state  of  facts  was  rather  intricate  as  set  out  in  the 
bill,  but  the  substance  of  them,  as  regards  the  question  to 
be  decided,  was  this: — Alfred  Darby  and  Abraham  Darby, 
the  last  Defendant  named,  who  were  brothers,  had  embarked 
in  a  joint  speculation  as  partners  in  the  purchase  of  divers 
real  estates,  for  which  they  had  jointly  paid  or  rendered 
themselves  liable.  The  arrangement  between  tliem  was,  that 
these  lands  were  bought  for  the  purpose  of  converting  them 
into  building  sites  in  plots,  and  reselling  them  at  a  profit. 
Portions  of  some  of  them  were  so  built  upon,  and  the  ground 
and  buildings  sold.  As  to  some  of  them,  the  legal  estate  had 
l)een  l)y  arrangement  conveyed  to  Alfred  Darby,  and  a  large 

(504) 


DARBY  V.  DARBY  505 

portion  at  the  death  of  Alfred  Darby  remained  unsold. 
There  was  a  memorandum  between  the  Darbys  and  certain 
other  persons  who  were  their  agents  for  the  sale  of  the  prop- 
erty, but  it  did  not  amount  to  a  clear  declaration  of  partner- 
ship, and  it  did  not  appear  that  there  was  any  actual  deed  or 
written  instrument  or  partnership  between  the  Messrs. 
Darby;  but  it  was  admitted  that,  in  fact,  their  arrangement 
and  course  of  dealing  amounted  to  this, — that  it  was  a  joint 
speculation ;  that  they  purchased  the  lands  with  their  joint 
monies ;  and  that  they  purchased  them  for  the  purpose  of 
laying  them  out  in  building  plots,  to  be  resold  for  their  joint 
profit  and  at  their  joint  loss ;  and  that  they  did  deal  with 
them  to  some  extent  on  the  footing  of  that  arrangement. 
The  principal  cjuestion,  and  the  only  one  which  this  report 
embraces,  was,  whether,  on  the  death  of  Alfred  Darby,  his 
share  of  the  unrealised  real  estate  descended  to  his  heir-at- 
law  A.  E.  W.  Darby,  or  whether  it  passed  as  personal  estate 
to  his  personal  representative.^ 

Vice-Chancellor  :  The  question  has  generally  arisen 
where  persons,  carrying  on  an  ordinary  commercial  or  mer- 
cantile partnership,  had  purchased  real  estate  for  the  pur- 
pose of  their  trade.  I  have  carefully  considered  the  author- 
ities on  the  subject,  and  the  result  of  them  appears  to  be 
this: — in  Thornton  v.  Dixon  [3  Br.  C.  C.  199]  Lord  Thur- 
low  said,  that  he  had  always  understood  that  where  partners 
bought  lands  for  the  purpose  of  a  partnership  concern  it 
was  to  be  considered  part  of  the  partnership  fund,  and  conse- 
quently must  be  considered  as  personalty,  and  distributable  as 
such ;  but  afterwards,  the  case  having  been  further  argued, 
his  Lordship  said,  that  if  the  agreement  had  been  that  the 
land  should  be  valued  and  sold,  it  would  have  converted  it 
into  personalty ;  but  that  the  agreement  in  the  case  before 
him  was  not  sufficient  to  vary  the  nature  of  the  property ; 
therefore  that,  after  the  dissolution,  the  property  would  re- 
sult according  to  its  respective  nature,  the  real  as  real,  the 


'  The  Reporter's  notes  of  the  argument  of  counsel  are  omitted. 


506        NATURE   OF  THE*  ASSOCIATES'   INTERESTS 

personal  as  personal  estate.  In  Bell  v.  Phyn  [7.  Ves,  453], 
and  Baliiiain  v.  Shore  [9  Ves.  500],  Sir  W.  Grant  decided 
simply  on  the  authority,  of  Thornton  v.  Dixon.  Lord  Eldon 
had  the  question  suggested  to  him  in  several  cases.  In  Rip- 
Icy  V.  Waterworth  [7  Ves.  425]  the  precise  question  did 
not  arise.  In  Tozvnscnd  v.  Dcvayncs  [i  Mont,  on  Partner- 
ship, App.  97],  Macintosh  and  three  other  persons  entered 
into  partnership  as  paper  makers,  and  purchased  lands,  on 
which  they  carried  on  the  business.  The  purchase-money  as 
to  part  was  paid  for  out  of  the  partnership  capital,  and  part 
was  left  on  mortgage  of  the  land.  The  value  of  the  premises 
was  treated  as  part  of  the  partnership  stock  and  capital  in 
stating  the  yearly  balances  of  the  partnership.  Macintosh 
having  died,  his  executors  sold  his  interest  in  the  partnership 
to  the  surviving  partners.  His  heir  claimed  so  much  as 
was  the  value  of  his  share  of  the  real  estate.  The  Master 
reported  in  favour  of  the  heir's  claim,  and  Lord  Eldon  al- 
lowed an  exception  to  the  report.  This  would  seem  to  be 
an  express  decision  on  the  point ;  but  in  Mr.  Jacob's  notes  to 
Roper's  Husband  and  Wife  [i  Rop.  H.  &  W.  346,  n.]  it 
is  suggested  that  the  decision  turned  on  an  instrument  dis- 
covered after  the  matter  had  been  referred  to  the  Master, 
and  that  probably  Lord  Eldon's  decision  went  on  the 
effect  of  that  particular  instrument.  In  a  subsequent  case 
before  Lord  Eldon,  "Sclkrig  v.  Davics  [2  Dow.  230],  the 
question  arose  as  to  a  Scotch  partnership ;  it  does  not  follow 
of  course  that  the  law  of  Scotland  and  England  are  the 
same  on  this  point;  but  in  the  course  of  the  argument  Lord 
Eldon  said  his  own  individual  opinion  was,  that  all 
property  involved  in  a  partnership  concern  ought  to  be  con- 
sidered as  personal.  In  another  Scotch  case,  Kirkpatrick  v. 
Sinic  [5  Paterson's  Scotch  Appeal  Cases,  525],  the  precise 
point  came  before  Lord  Eldon  on  a  Scotch  partnership;  and 
he  said,  "As  to  all  partnerships  in  England  I  think  the  rule 
is,  and  the  better  rule  of  decision  would  be,  to  say  that  the 
partners  held  the  property  as  trustees  for  the  creditors,  and 
that  the  whole  became  personal  estate.    If  the  course  of  de- 


I 


DARBY  V.  DARBY  507 

cisions  in  this  country  had  run  uniformly  to  that  effect,  I 
sliould  have  thought  it  right  to  say  that  the  same  rule  of 
law  should  prevail  in  Scotland.  But  if  there  have  been  cases 
in  England  ruled  differently,  I  could  not  advise  that  the 
Courts  in  Scotland  should  adopt  that  which  I  consider  the 
best  principle  of  law  in  such  a  case.  Till  the  case  decided 
by  Lord  Thurlow  the  lawyers  always  considered  the  real 
estate  belonging  to  a  partnership  as  personal  in  point  of  suc- 
cession;  and  we  have  always  wished  to  get  out  of  that  case 
of  Lord  Thurlow's."  It  is  impossible  that  any  thing  can  be 
more  clear  and  distinct  than  Lord  Eldon's  opinion  as  to 
what  the  law  ought  to  be,  and  that  Lord  Thurlow's  decision 
in  Thornton  v.  Dixon  could  not  be  supported. 

In  Stuart  v.  Marquis  of  Bute  [  1 1  Ves.,  see  p.  665]  Lord 
Eldon  said,  "In  cases  where  persons  engaged  in  partnership 
have  bought  freehold  houses,  the  difficulty  of  distinguishing 
and  arranging  property  of  different  natures,  partly  personal, 
partly  real,  has  never,  except  by  the  effect  of  the  contract  or 
the  will,  been  held  sufficient  against  the  heir."  This  dictum 
at  first  sight  seems  to  imply  an  assertion  of  the  heir's  title; 
but  I  think  Lord  Eldon  only  meant  to  intimate,  that  when- 
ever the  heir  w'as  entitled,  his  title  should  not  be  prejudiced 
by  any  difficulty  that  might  arise  in  distinguishing  the  realty 
from  the  personalty.  In  Crazvshay  v.  Maulc  [i  Swanst.  495] 
Lord  Eldon  said,  "It  has  been  repeatedly  decided  that  inter- 
ests in  lands,  purchased  for  the  purpose  of  carrying  on  trade, 
are  no  more  than  stock-in-trade."  And,  on  a  subsequent 
day,  he  said,  "For  ordinary  purposes  a  lease  is  no  more  than 
stock-in-trade,  and,  as  part  of  the  stock,  may  be  sold;  nor 
would  it  be  material  that  the  estate  purchased  by  a  partner- 
ship was  freehold,  if  intended  only  as  an  article  of  stock; 
though  a  question  might  in  that  case  arise  on  the  death  of 
a  partner  whether  it  would  pass  as  real  estate  or  as  stock, 
personal  estate  in  enjoyment,  though  freehold  in  nature  and 
quality."  These  are  the  only  cases  in  which  the  matter  came 
before  Lord  Eldon;  and  in  three  of  them  he  expressed  a 
clear  opinion  that  the  law  ought  to  be,  that  where  partners 


5(18         XATTRE   OF  THE   ASSOCIATES'   INTERESTS 

purchase  land  for  partnershij)  purposes,  it  should  be  treated 
as  personal  property. 

Tlien  there  are  three  cases  before  Sir  J.  Leach,  and  in 
each  of  these  cases  he  held,  without  any  doubt,  that  the  real 
property  became  personalty,  and  that  the  personal  represent- 
atives of  the  deceased  partner  had  the  right  to  his  share.  The 
first  is  Fcrcday  v.  Wightzvick  [i  Russ.  &  Myl.  45],  and 
there  he  says,  "The  general  principle  is,  that  all  property 
acquired  for  the  purpose  of  a  trading  concern,  whether  it  be 
of  a  personal  or  real  nature,  is  to  be  considered  as  partner- 
ship property,  and  is  to  be  first  applied  accordingly  in  satis- 
faction of  the  demands  of  the  partnership."  Now  the  decision 
in  that  case  may  be  said  to  go  only  to  the  extent  of  determin- 
ing that  it  is  partnership  property  as  among  the  partners. 
But  in  Phillips  v.  Phillips  [i  Myl.  &  K.  649]  Sir  J.  Leach 
said,  *T  confess  I  have  for  some  years,  notwithstanding 
older  authorities,  considered  it  to  be  settled  that  all  property, 
whatever  might  be  its  nature,  purchased  with  partner- 
ship capital  for  the  purposes  of  the  partnership  trade,  con- 
tinued to  be  partnership  capital,  and  to  have  to  every  intent 
the  quality  of  personal  estate ;  and,  in  the  case  of  Fcrcday  v. 
Wightzvick,  I  had  no  intention  to  confine  the  principle  to  the 
payment  of  partnership  demands." 

The  third  case,  before  Sir  J.  Leach,  is  Broiii  v.  Broui 
[3  Myl.  &  K.  443],  which  was  a  decision  to  the  same  effect, 
between  the  trustees  and  the  personal  representative  of  the 
deceased  partner. 

There  are  also  three  cases  before  Sir.  L.  Shadwell.  In 
Randall  v.  Randall  [7  Sim.  271] — [His  Honor  referred  to 
the  facts  of  the  case] — the  Vice-Chancellor  held  that  the 
share  of  the  deceased  partner  in  real  estate  was  not  converted 
into  personalty.  In  Cookson  v.  Cookson  [8  Sim.  529],  the 
Vice-Chancellor  also  held  that  the  property  in  question, 
which  was  freehold,  remained  freehold  property ;  but  in  the 
last  case  before  Sir  L.  Shadwell,  of  Houghton  v.  Houghton 
[11  Sim.  491],  he  decided  otherwise,  and,  from  the  judg- 
ment in  that  case,  it  is  evident  that  Sir  L.  Shadwell  consid- 


I 


DARBY  V.  DARBY  509 

ered  that  if  the  facts  were  such  that  the  real  estate  had  be- 
come parfncrshif)  property,  it  would  assume  the  nature  and 
character  of  personal  estate.  And  I  conceive  that  the  reason 
why  he  decided  the  two  previous  cases  otherwise  was.  that 
in  those  cases  he  did  not  consider  that  the  property  had 
become  partnership  property. 

The  result,  then,  of  the  authorities  may  be  thus  stated  : 
— Lord  Thurlow  was  of  opinion  that  a  special  contract 
was  necessary  to  convert  the  land  into  personalty;  and  Sir 
W.  Grant  followed  that  decision.  Lord  Eldon  on  more 
than  one  occasion  strongly  expressed  his  opinion  that  Lord 
Thurlow's  decision  was  wrong.  Sir  J.  Leach  clearly  de- 
cided in  three  cases  that  there  was  conversion  out  and  out ; 
and  Sir  L.  Shadwell,  in  the  last  case  before  him,  clearly  de- 
cided in  the  same  w'ay.    That  is  the  state  of  the  authorities. 

Now  it  appears  to  me  that,  irrespective  of  authority, 
and  looking  at  the  matter  with  reference  to  principles  w'ell 
established  in  this  Court,  if  partners  purchase  land  merely 
for  the  purpose  of  their  trade,  and  pay  for  it  out  of  the  part- 
nership property,  that  transaction  makes  the  property  per- 
sonalty, and  effects  a  conversion  out  and  out. 

What  is  the  clear  principle  of  this  Court  as  to  the  law 
of  partnership?  It  is,  that  on  the  dissolution  of  the  partner- 
ship all  the  property  belonging  to  the  partnership  shall  be 
sold,  and  the  proceeds  of  the  sale,  after  discharging  all  the  part- 
nership debts  and  liabilities,  shall  be  divided  among  the  part- 
ners, according  to  their  respective  shares  in  the  capital.  That 
is  the  general  rule ;  it  requires  no  special  stipulation ;  it  is 
inherent  in  the  very  contract  of  partnership.  That  the  rule 
applies  to  all  ordinary  partnership  property  is  beyond  all 
question,  and  no  one  partner  has  a  right  to  insist  that  any 
particular  part  or  item  of  the  partnership  property  shall  re- 
main unsold,  and  that  he  shall  retain  his  ow'n  share  of  it  in 
specie.  This  principle  is  clearly  laid  down  by  Lord  Eldon 
in  Crazvsliay  v.  Collins  [15  Ves.  218],  and  by  Sir  W.  Grant 
in  Fcatherstonhaugh  v.  Fcnwick  [17  Ves.  298],  and  the 
right  of  each  partner  to  insist  on  a  sale  of  all  the  partnership 


510        NATURE   OF  THE   ASSOCIATES'    INTERESTS 

property,  which  arises  from  what  is  implied  in  the  contract 
of  partnership,  is  just  as  stringent  as  a  special  contract  would 
be.  If,  then,  tiiis  rule  apphes  to  ordinary  stock-in-trade,  why 
should  it  not  apply  to  all  kinds  of  partnership  property? 
Suppose  that  partners,  for  the  purpose  of  carrying  on  their 
business,  purchase,  out  of  the  funds  of  the  partnership,  lease- 
hold estate,  or  take  a  lease  of  land,  paying  the  rent  out  of 
the  partnership  funds,  can  it  be  doubted  that  the  same  rule 
which  applies  to  ordinary  chattels  would  apply  to  such  lease- 
hold property?  I  do  not  think  it  was  ever  questioned  that, 
on  a  dissolution,  the  right  of  each  partner  to  have  the  part- 
nership effects  sold  applies  to  leasehold  property  belonging" 
to  the  partnership  as  much  as  to  any  other  stock-in-trade.  No 
one  partner  can  insist  on  retaining  his  share  unsold.  Nor 
would  it  make  any  difference  in  whom  the  legal  estate  was 
vested,  whether  in  one  of  the  partners  or  in  all ;  this  Court 
would  regulate  the  matter  according  to  the  ecjuities.  And 
Sir  W.  Grant  so  decided  in  Featherstonhaugh  v.  Fenzvick. 

If,  then,  the  rule  applies  not  only  to  ordinary  stock-in- 
trade,  but  also  to  a  lease  for  years, — suppose  next,  that  the 
partnership,  instead  of  purchasing  a  term  of  years,  were 
(whether  from  necessity  or  choice)  to  purchase  land  in  fee; 
if  the  land  is  necessary  for  the  partnership  business,  and 
bought  with  the  partnership  assets,  what  difference  can  it 
make  whether  the  real  estate  bought  is  leasehold  or  in  fee? 
Let  it  be  once  established  that  the  property  purchased  is 
partnership  property,  and  it  then  comes  under  the  operation 
of  those  principles  which  arise  out  of  the  partnership  con- 
tract ;  and  there  seems  to  be  no  reason  why  the  operation  of 
those  principles  is  to  be  restricted  to  any  particular  class  or 
species  of  partnership  property.  The  observations  of  Lord 
Eldon  in  Craivshay  v.  Maule,  before  referred  to,  show  that 
in  his  opinion  the  right  to  a  sale  on  a  dissolution  of  partner- 
ship does  not  in  any  degree  depend  on  the  nature  of  the 
property.  Nor  could  it  be  material  in  this  case,  any  more 
than  on  the  purchase  of  a  leasehold  interest,  in  whom  the 
legal  estate  was  vested. 


DARBY  V.  DARBY  511 

I  should,  therefore,  feel  no  hesitation  in  coming  to  this 
conclusion,  that  the  mere  contract  of  partnership,  without 
any  express  stipulation,  involves  in  it  an  implied  contract, 
quite  as  stringent  as  if  it  were  expressed,  that,  at  the  dissolu- 
tion of  the  partnership,  all  the  property  then  belonging  to 
the  partnership,  whether  it  be  ordinary  stock-in-trade,  or  a 
leasehold  interest,  or  a  fee  simple  estate  in  land,  shall  be 
sold,  and  the  net  proceeds,  after  satisfying  all  the  partnership 
debts  and  liabilities,  be  divided  among  the  partners;  and  that 
each  partner,  and  the  representatives  of  any  deceased  part- 
ner, have  a  right  to  insist  on  this  being  done. 

Next,  what  is  the  doctrine  of  this  Court  as  to  conver- 
sion? If  a  testator  seised  of  real  estate  devises  it  for  sale, 
and  directs  that  the  proceeds  of  the  sale  shall  be  divided 
among  certain  persons,  so  that  each  of  the  ccstuis  que  trust- 
cut  is  entitled  to  say  he  will  have  it  sold,  and  will  take  his 
share  of  the  proceeds,  that  real  estate  is  in  equity  converted 
into  personalty ;  and  so,  if  three  persons  contract  that  certain 
real  property  belonging  to  them  shall  be  sold,  and  the  pro- 
ceeds be  divided  among  them,  so  that  each  one  of  them  has 
a  right  to  insist  that  it  shall  be  sold,  and  that  he  shall  have 
his  share  of  the  proceeds  as  uioucy,  that  real  property  is  in 
equity  converted  into  personalty,  and  if  any  one  of  them 
dies  while  the  property  remains  unsold,  his  share  is  person- 
alty as  between  his  heir  and  his  personal  representatives. 

Now  if  it  be  established  that,  by  the  contract  of  partner- 
ship, all  the  partnership  property  is  to  be  sold  at  the 
dissolution  of  the  partnership,  then  any  real  property  which 
has  become  the  property  of  the  partnership  becomes,  by 
force  of  the  partnership  contract,  converted  into  personalty; 
and  that,  not  merely  as  between  the  partners,  to  the  extent 
of  discharging  the  partnership  debts,  but  as  between  the  real 
and  personal  representatives  of  any  deceased  partner. 

That  this  is  so,  I  should,  in  the  absence  of  all  author- 
ity, have  decided  upon  principle ;  and  when  I  find,  notwith- 
standing the  decision  of  Lord  Thurlow,  followed  by  Sir  W. 
Grant,  that  Lord  Eldon  was  clearly  of  opinion  that  real 


512         NATURE   OF  THE   ASSOCIATES'   INTERESTS 

property  purchased  by  a  partnership  for  partnership  pur- 
poses, and  with  the  partnership  funds,  becomes  personalty ; 
that  Sir  J.  Leach  repeatedly  so  decided  without  any  doubt; 
and  that  Sir  L.  Shadwell  also  decided  the  last  case  in  the 
same  way, — I  can  have  no  difficulty  in  coming  to  the  con- 
clusion, that  whenever  a  partnership  purchase  real  estate 
for  the  partncrsJiip  purposes,  and  with  the  partnership  funds, 
it  is  as  between  the  real  and  personal  representatives  of  the 
partners  personal  estate. 

Now  this  case  is  not  the  ordinary  case,  where  persons 
carrying  on  the  ordinary  business  of  a  commercial  or  manu- 
facturing partnership  have  found  it  necessary  to  purchase 
real  estate  for  partnership  purposes.  That  is  not  the  case; 
here  they  bought  land  as  the  stock-in-trade,  by  the  sale  of 
which  they  were  to  make  their  i)rofits ; — the  land  was  not 
in  the  nature  of  plant,  but  was  the  very  subject-matter  of 
their  trade.  Does  that  make  any  difference?  If  it  does, 
I  think  it  is  in  favour  of  treating  it  as  converted ;  because 
the  real  estate  is  here  clearly  put  in  the  same  position  as 
ordinary  stock-in-trade;  and  it  appears  to  me  that  if  I  enter- 
tained more  doubt  than  I  do  on  the  general  question,  that 
doubt  would,  in  this  case,  be  very  much  diminished  by  the 
circumstance,  that  here  the  real  estate  is  itself  bought  for 
the  very  purpose  of  selling  it  again.  The  very  intention  of 
the  partnership  was  to  buy  land  to  resell  it.  That  is  their 
very  contract,  and,  without  selling  the  land  again,  there 
would  be  no  partnership  business, — the  partnership  was  for 
the  purpose  of  buying  land  to  parcel  it  out  in  plots,  and  to 
sell  them  again,  and  each  partner  had  a  right  to  say  he  would 
have  that  contract  carried  out.  We  have  here  what  Lord 
Thurlow  wanted  in  Thornton  v.  Dixon,  an  actual  contract 
that  the  land  shall  be  sold. 

I  must,  therefore,  decide  that  the  share  of  A.  Darby 
was  personal  estate,  and  passed  to  his  personal  representa- 
tives. 


SHEARER  f.  SHEARER  513 


SHEARER  z'.  SHEARER. 

In  the  Supreme  Judicial  Court  of  Massachusetts, 

1867. 

98  Massachusetts  Reports,  107. 

Bill  in  Equity  by  the  administratrix  of  Leonard  B. 
Shearer,  to  compel  the  conversion,  and  division  as  person- 
alty, of  real  estate,  bonds  for  the  conveyance  of  real  estate, 
and  proceeds  of  real  estate  by  way  of  rent  or  sales  since  the 
death  of  the  complainant's  intestate,  remaining  as  the  prop- 
erty of  certain  partnerships  of  which  he  was  a  member,  after 
the  settlement  of  their  affairs.^ 

Wells,  J. :  A  former  bill,  brought  by  the  same  party, 
substantially  for  the  same  purposes  as  the  present,  was  dis- 
missed on  the  ground  that  the  right  to  adjust  the  affairs  of 
the  subsidiary  partnerships  of  Shearer  &  Paine,  and  Shearer 
&  Jones,  and  to  receive  the  net  results  thereof  due  to  the 
original  partnership  of  L.  B.  &  D.  L.  Shearer,  belonged  to 
D.  L.  Shearer,  as  the  survivor  of  that  firm.  12  Allen,  289. 
Since  then,  the  affairs  of  those  subsidiary  partnerships  have 
been  closed,  and  the  respective  shares  of  Paine  and  Jones 
assigned,  or  designated  to  be  assigned  to  them;  the  debts  of 
the  several  partnerships  have  been  fully  paid,  and  all  part- 
nership balances  have  been  adjusted  and  paid.  The  personal 
property  sufficed  to  repay  all  that  remained  due  of  the  orig- 
inal capital  of  the  plaintiff's  intestate  and  of  D.  L.  Shearer: 
and  the  balance  of  personal  property  has  been  divided  be- 
tween the  plaintiff  and  D.  L.  Shearer,  according  to  their 
respective  rights  under  the  i)artnership  articles.  1'hat  which 
remains,  to  which  the  prayer  of  this  bill  applies,  consists  of 
real  estate,  bonds  for  the  conveyance  of  real  estate,  and  pro- 
ceeds of  real  estate,  by  way  of  rent  and  of  sales,  since  the 


'  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


514        NATURE   OF  THE   ASSOCIATES"   INTERESTS 

decease  of  the  plaintiff's  intestate.  Of  this  l^alance,  the  estate 
of  L.  B.  Shearer  is  entitled  to  two-thirds,  and  D.  L.  Shearer 
to  one-third.  The  distribntion  of  this  balance  has  been  agreed 
upon  by  designating  the  several  parcels  and  amounts  to  be 
assigned  for  the  share  of  each  party.  This  arrangement  has 
been  agreed  to  by  all  parties  interested,  but  with  the  express 
proviso  that  it  shall  not  prejudice  the  plaintiff  in  any  of  the 
rights  which  she  claims  by  this  bill,  namely,  to  have  the  share 
of  her  intestate  conveyed  to  her  as  administratrix,  or  sold 
and  the  proceeds  paid  over  to  her. 

This  claim  of  the  administratrix  is  not  founded  upon 
the  rights  of  creditors ;  and  apparently  there  are  no  creditors 
to  require  the  conversion  of  the  real  estate.  Some  reliance  is 
placed  upon  a  special  agreement  or  declaration  between 
Shearer  and  Paine,  in  regard  to  lands  previously  acquired 
by  that  firm ;  but  we  do  not  see  in  that  writing  any  indica- 
tion of  purpose  other  than  that  all  lands  so  acquired  should 
be  for  the  benefit  of  the  parties  in  proportion  to  their  interest 
in  the  copartnership,  and  not  according  to  the  state  of  the 
legal  title. 

The  plaintiff's  claim  must  rest,  and  is  mainly  placed 
by  the  argument  of  her  counsel,  upon  the  general  rule  that 
has  been  aflirmed  by  some  authorities  elsewhere,  that,  as 
between  the  heir  and  the  personal  representative  of  a  de- 
ceased partner,  the  real  estate  of  the  partnership  is  to  be 
regarded  in  equity  as  personal  estate.  Some  special  facts, 
as  to  the  location  and  legal  title  of  the  lands  in  question,  are 
relied  upon  to  strengthen  the  equitable  considerations  in 
favor  of  the  widow  in  this  case. 

In  Wilcox  V.  IVilco.v,  13  Allen,  252,  it  was  held  that 
where,  after  all  debts  and  l^alances  between  the  partners  are 
satisfied,  there  remains  real  estate  of  the  copartnership,  in 
which  the  legal  title  of  each  partner  corresponds  to  his  inter- 
est or  share  in  the  partnership,  equity  will  not  interfere  for 
the  purpose  of  converting  such  real  estate  into  personalty. 
In  the  present  case  the  legal  title  does  not  correspond  with 
the  beneficial  interests  of  the  several  partners.      Not  only 


SHEARER  V.  SHEARER  515 

are  the  shares  of  the  partners  unequal  under  the  partnership 
agreements,  but  much  of  the  real  estate  is  held  without  re- 
gard to  the  beneficial  interest,  either  in  the  sole  name  of 
Paine,  or  otherwise,  as  convenience  suggested  at  the  time 
of  purchase. 

Assuming  that  the  force  of  the  decision  in  IVilcox  v. 
Wilcox  is  to  be  limited  to  the  precise  state  of  facts  there 
presented,  the  question  now  is  whether  its  principle  extends 
to  cases  where  a  proper  adjustment  of  the  rights  of  the 
partners  is  not  secured  by  descent  of  the  legal  title,  but  re- 
quires the  voluntary  recognition  or  judicial  determination  of 
equitable  rights  more  extensive  than  the  legal  title.  That 
decision  proceeded  upon  the  ground  that  the  application  of 
the  principles  of  implied  trusts  to  the  real  estate  of  partner- 
ships constituted  the  whole  foundation  and  the  origin  of  the 
doctrine  of  equitable  conversion ;  and  that  those  trusts  are  to 
be  administered  solely  f<:>r  the  purpose  of  enforcing  the  obli- 
gations and  securing  the  rights  of  the  partners,  as  between 
themselves.  When  the  legal  title  is  held  by  one  partner  in 
excess  of  his  beneficial  interest,  it  is  held  in  trust  for  the 
purposes  of  the  partnership,  and  is  chargeable,  in  equity, 
with  all  obligations  growing  out  of  that  relation.  Against 
such  party,  and  against  his  widow  and  heirs,  equity  will 
interpose  to  secure  to  his  copartners  their  actual  beneficial 
interest. 

Neither  the  ground  of  interposition  nor  the  mode  of  its 
exercise  is  changed  by  the  decease  of  the  party  in  whose  be- 
half it  is  required.  His  representatives  are  substituted  in 
his  place.  Their  rights  are  derivative  merely.  Equities  be- 
tween them,  if  any  there  be,  are  subordinate  and  posterior 
to  those  which  spring  from  the  relation  of  copartnership. 
The  conversion  of  real  estate  into  personalty  is  worked,  if 
at  all,  for  the  purpose  of  adjusting  the  afifairs  of  the  partner- 
ship. It  would  seem,  therefore,  that  the  conversion  should 
be  made  only  when  and  so  far  as  required  for  that  purpose ; 
and  that  the  effect  upon  the  descent  or  distribution  of  the 
share  of  a  deceased  partner  among  his  representatives  should 


516         NATURE   OF  THE   ASSOCIATES'   INTERESTS 

be  regarded  as  incidental  merely,  and  not  an  end  for  which 
the  interference  of  a  court  of  equity  is  to  be  sought. 

In  this  view  of  the  grounds  and  purpose  of  such  equit- 
able conversion,  even  regarding  all  partnership  real  estate, 
however  the  legal  title  may  be  held,  as  held  in  trust  for  the 
partnership,  this  court  are  disposed  to  hold,  notwithstanding 
the  great  weight  of  authority  to  the  contrary  elsewhere,  that 
such  real  estate  is  to  be  converted  into  personalty  only  when 
such  conversion  is    required    for    the    payment  of  claims 
against  the  partnership  which  are  in  the  nature  of  debt. 
Balances  due  to  individual  partners,   for  advances  to  the 
firm,  or  for  payments  made  in  its  behalf,  come  within  this 
definition.     So  also  may  capital,  furnished  by  one  partner, 
when  by  the  terms  upon  which  it  was  furnished,  or  from 
the  nature  and  necessity  of  the  case,  it  is  to  be  repaid  in 
specific  amounts,  in  order  to  reach  the  net  result,  or  body  of 
the  partnership  interests,  to  which  the  proportional  rights 
or  shares  of  the  several  partners  attach.    In  short,  whatever 
is  required  to  be  paid  or  measured  in  precise  sums  must  be 
so  adjusted ;  and   real  estate,   converted   for  that  purpose, 
undoubtedly  becomes  personalty,  and  is  to  be  distributed  as 
such  when  paid  over  to  the  party  entitled.     But  the  shares 
in  the  body  of  the  partnership  property,  those  interests  which 
are  not  measured  by  precise  amounts,  but  consist  in  a  com- 
mon proprietorship  after  all  special  claims  are  satisfied,  stand 
upon  dififerent  footing.     These  interests  are  determined  by 
the  proportions  fixed  by  the  articles  or  organic  law  of  the 
partnership.    When  the  beneficial  interests  and  the  legal  title 
correspond,  it  has  already  been  decided  that  the  rights  of 
the  partners  in  real  estate  so  held  will  be  left  to  adjust  them- 
selves by  the  descent  of  the  legal  title,  with  its  incidents, 
as  real  estate  of  the  several  partners,  held  in  common.     JVil- 
cox  V.  IVilcox,  nbi  supra.    When  the  legal  title  is  otherwise 
held,  it  is  held  in  trust ;  and  the  equitable  title  descends  in 
like  manner  and  with  like  incidents,  except  as  to  dower. 
The  office  of  equity  in  such  case  is  merely  to  declare  the 
trusts,  and  compel  the  legal  title  to  serve  the  ecjuitable  inter- 


1 


SHEARER  T'.  SHEARER  Sl7 

ests.  This  is  accomplished  by  directing"  such  conveyances 
as  will  make  the  legal  title  of  the  several  parties  conform 
to  their  respective  beneficial  interests. 

By  the  rule  above  indicated,  all  partnership  rights 'and 
obligations  are  secured,  and  all  equities  growing  out  of  that 
relation  are  met  and  answered.  To  require  equitable  inter- 
ference to  go  further,  and  convert  all  real  estate  into  person- 
alty, for  the  mere  purpose  of  a  division,  seems  to  us  to  be  an 
unnecessary  invasion  of  the  rights  of  the  copartners,  and, 
when  undertaken  in  the  interest  of  one  class  of  the  represent- 
atives of  a  deceased  partner,  against  another  class  of  rep- 
resentatives of  the  same  partner,  it  seems  to  be  a  departure 
from  the  legitimate  sphere  of  equitable  jurisdiction.  It  is 
not  the  province  of  equity  to  seek  to  counteract  or  modify 
the  operation  of  the  laws  of  descent  and  distribution. 

The  widow's  right  of  dower  in  her  husband's  interest 
in  partnership  real  estate,  is  not  held  subject  to  the  payment 
of  his  private  debts.  As  a  general  fact,  this  incident  makes 
dower  a  more  valuable  interest  than  the  distributive  share 
of  the  widow  would  be  if  the  real  estate  were  to  be  con- 
verted. But  we  do  not  regard  that  circumstance  as  of  any 
weight  in  determining  the  general  rule  against  such  con- 
version. On  the  other  hand,  in  our  view,  the  special  facts, 
which,  in  the  present  case,  would  make  it  more  advantageous 
for  the  widow  that  the  partnership  realty  should  be  con- 
verted into  personal  estate,  furnish  no  ground  for  such  con- 
version. The  equitable  powers  of  the  court  are  not  called 
into  exercise  for  the  settlement  of  the  estate  of  the  deceased 
partner. 

There  are  no  equities  between  heirs  and  distributees, 
under  our  laws,  which  can  call  into  exercise  or  quicken  the 
powers  of  the  court  for  the  conversion  of  realty  into  person- 
alty. We  do  not  understand  that,  in  the  English  courts,  any 
such  supposed  equities  have  ever  been  made  a  ground  for  the 
doctrine  of  equitable  conversion,  as  held  there.  In  the  case 
of  Cookson  V.  Cooksou,  8  Sim.  529,  such  a  ground  of  inter- 
ference was  emphatically  discarded.     That  case,  however, 


51S         NATITRE   OF  THE   ASSOCIATES'   INTERESTS 

is  not  one  in  which  the  full  extent  of  the  English  doctrine 
was  asserted. 

Conversion  into  personalty  is  not  necessary  to  enable 
creditors  of  the  individual  partner  to  secure  payment  of  their 
debts  out  of  the  share  of  their  debtor  in  real  estate  held  in 
copartnership.  By  our  laws,  all  property  of  a  debtor, 
whether  personal  or  real,  is  liable  for  payment  of  all  his 
debts.  Creditors  therefore  require  no  equitable  interposi- 
tion, except  such  as  may  be  necessary  for  the  assertion  of 
the  rights  of  the  partner  himself.  Their  rights  are  secured, 
in  respect  to  real  estate  held  in  copartnership,  through  the 
equities  which  pertain  to  their  debtor.  In  this  particular  the 
laws  of  England  dififer.  The  inheritance  there,  being  exempt 
from  liability  for  debts  by  simple  contract,  it  is  only  by  con- 
version and  payment  of  the  proceeds  to  the  personal  repre- 
sentatives of  a  deceased  partner  that  his  private  creditors 
can  receive  payment  out  of  such  property.  How  far,  if  at 
all,  this  consideration  may  have  been  inlEiential  in  determin- 
ing the  extent  to  which  the  doctrine  of  equitable  conversion 
should  be  carried,  and  in  establishing  the  right  of  the  per- 
sonal representative  to  require  it  to  be  made  in  his  favor, 
we  are  unal)le  to  judge.  The  cases  in  which  the  personal 
representative  of  a  deceased  partner  has  been  held  entitled 
to  enforce  this  right  against  the  heir,  do  not  indicate,  so  far 
as  we  have  been  able  to  examine  them,  whether  it  is  done  in 
behalf  of  creditors  or  of  distributees.  The  doctrine,  how- 
ever, seems  now  to  be  fully  established,  without  regard  to 
the  consideration  whether  there  are  private  creditors  or  not. 
Darby  v.  Darby,  3  Drewry,  495.  This  may  perhaps  be  re- 
garded as  the  most  natural  result  of  the  rule  holding  such 
property  liable  for  the  payment  of  all  partnership  obligations, 
when  it  is  considered  how  far  that  liability  deprived  partner- 
ship real  estate  of  the  fixedness  and  permanency  of  owner- 
ship which  characterize  the  inheritance  in  realty  there. 

We  cannot  dismiss  the  subject  without  adverting  to 
some  of  the  considerations  upon  which  the  rule  of  conversion 


SHEARER  7'.  SHEARER  519 

"out  and  out"  is  maintained  in  the  case  last  cited,  and  which 
have  been  pressed  in  the  argument  before  us. 

One  reason  for  such  conversion  is  said  to  be,  that  courts 
know  no  mode  of  estimating  the  property,  and  making  di\4- 
sion  of  the  shares  between  the  partners,  except  by  sale  and 
reduction  to  money ;  and,  furthermore,  that  one  partner  has 
no  right  to  claim,  and  cannot  be  required  to  accept,  his  share 
of  the  capital  or  profits  in  the  form  of  an  undivided  interest 
in  specific  property.  But  this  assumes  the  whole  question. 
In  relation  to  personal  property,  there  is  a  practical  difficulty 
in  this  respect.  The  law  recognizes  it,  and,  upon  the  death 
of  one  partner,  vests  the  whole  title  in  the  survivor.  Even 
during  the  continuance  of  the  copartnership,  one  partner  may 
transfer  the  entire  title  of  the  firm  by  sale  of  any  of  its 
personal  property  in  the  course  of  its  business.  In  regard 
to  such  property,  the  rule  that  it  is  to  be  in  all  cases  converted 
into  money  is  undoubtedly  well  established  and  entirely  uni- 
form everywhere.  In  this,  equity  follows  the  analogies  of 
the  law.  On  the  other  hand,  neither  partner  can  convey 
the  interest  of  his  copartner  in  real  estate.  The  law  pro- 
vides for  its  transmission  in  undivided  shares ;  for  its  par- 
tition ;  for  its  descent  to  the  heirs  of  a  deceased  partner.  It 
seems  to  us  best  to  accord  with  the  general  principles  of 
equitable  interference  that  equity  should  recognize  the  divi- 
sion of  real  estate  held  by  copartners  as  already  effected 
by  operation  of  law,  unless  and  except  so  far  as  the  terms  of 
the  copartnership  and  the  state  of  the  accounts  recjuire  its 
interposition  in  order  to  make  the  legal  title  conform  to  the 
equitable  or  beneficial  interest.  When  this  is  accomplished, 
equity  has  no  longer  any  office  to  perform  towards  it. 

Again,  it  is  said  "that  the  mere  contract  of  partnership, 
without  any  express  stipulation,  involves  in  it  an  implied 
contract  quite  as  stringent  as  if  it  were  expressed,  that,  at 
the  dissolution  of  the  partnership,  all  the  property  then  be- 
longing to  the  partnership,  whether  it  be  ordinary  stock  in 
trade,  or  a  leasehold  interest,  or  a  fee-simple  estate  in  land, 
shall  be  sold,  and  the  net  proceeds,  after  satisfying  all  the 


520        NATURE   OF  THE   ASSOCIATES'   INTERESTS 

partnership  debts  and  liabilities,  be  divided  among  the  part- 
ners; and  that  each  partner  and  the  representatives  of  any 
deceased  partner  have  a  right  to  insist  on  this  being  done." 

In  our  view,  there  are  several  objections  to  such  an 
implication  of  agreement,  as  the  foundation  of  a  rule  of 
equitable  conversion.  In  the  first  place,  it  seems  necessary 
to  assume  in  the  outset  that  such  is  the  established  rule,  and 
that  parties  are  to  be  presumed  to  become  partners  in  refer- 
ence to  its  operation,  in  order  to  predicate  such  an  inference 
from  the  mere  fact  of  engaging  in  a  joint  business.  It  would 
be  especially  difiicult,  without  such  assumption,  to  find  a 
pretext  for  the  inference,  where  the  parties  have  entered 
into  written  articles  and  omitted  all  provision  of  that  charac- 
ter. If  the  inference  of  such  an  agreement  is  to  be  made 
as  part  of  the  transaction  of  purchasing  real  estate  with 
partnership  funds,  for  partnership  use,  it  is  equally  incon- 
sistent with  the  failure  to  express  such  a  term  in  the  deed 
of  conveyance.  The  inconsistency  is  even  greater  than  that ; 
for,  by  the  express  terms  of  the  deed  and  by  the  well  known 
operation  of  law,  the  estate  is  limited  to  the  heirs  of  the 
several  copartners,  whose  estate  is,  at  law,  the  ordinary  one 
of  tenants  in  common. 

In  the  second  place,  conceding  the  agreement  as  sup- 
posed, either  express  (provided  it  be  not  in  writing)  or 
implied,  it  is  not  such  a  contract  as  entitles  the  parties  to  a 
specific  performance,  and  it  does  not  create  the  trust  required 
for  the  conversion  of  real  estate.  The  statute  demands  a 
written  agreement  for  that  purpose.  Gen.  Sts.  c.  loo,  Sec. 
19.     The  English  statute  seems  equally  to  require  it. 

The  implied  trust,  which  is  enforced  in  equity  for  the 
adjustment  of  partnership  obligations,  results  from  the  in- 
vestment of  the  funds  of  the  partnership  in  the  real  estate 
in  question,  for  the  use  of  the  partnership.  Regarding  it  in 
that  light,  the  court  have  but  to  inquire  to  what  use  the  funds, 
represented  in  the  land,  are  devoted ;  to  whom  and  in  what 
proportions  the  beneficial  interests  belong:  and  the  execution 
of  the  trust  will  follow  according  to  the  nature  of  the  rights 


SHEARER  V.  SHEARER  521 

to  be  secured.  It  is  not  necessary  to  resort  to  inventions  to 
work  ont  the  equities  of  the  case  through  some  imphed  con- 
tract, or  supposed  intentions  of  the  parties  in  entering  into  the 
relation  of  partnership,  or  in  applying  it  to  the  ownership  of 
land.  The  ordinary,  well  known  and  generally  recognized 
principles  of  equity,  as  applied  to  trusts  resulting  by 
implication  of  law,  are  sufficient  for  all  the  require- 
ments of  that  relation.  We  are  satisfied  that  the  principles 
which  we  ha\'e  indicated  apply  equally  to  every  condition 
in  which  the  legal  title  may  be  placed,  and  to  every  degree 
and  proportion  of  interest  tQ  which  the  se\'eral  partners  may 
be  entitled. 

It  was  the  right  of  the  surviving  partner  to  apply  part- 
nership funds  for  the  liquidation  of  any  obligations  of  the 
firm,  and  for  the  discharge  of  all  liens  upon  the  joint  prop- 
erty. The  payment  of  money  to  release  partnership  real 
estate  from  incumbrances  which  existed  thereon  at  the  time 
of  its  purchase,  although  not  a  debt  wdiich  they  were  other- 
wise bound  to  pay,  was  in  accordance  with  the  rights  and 
interests  of  the  copartners,  as  such,  and  might  properly  be 
done  as  a  part  of  the  adjustment  of  the  partnership  affairs, 
before  division.  We  do  not  see  that  the  plaintiff,  either  as 
widow  or  as  administratrix,  can  claim  to  have  such  real 
estate  interest  converted  back  again  into  personalty. 

The  bonds,  or  contracts  for  the  purchase  of  real  estate, 
may  properly  be  fulfilled ;  and,  if  fulfilled  by  a  conveyance 
according  to  their  terms,  or  if  specifically  enforced,  the 
rights  of  the  widow  and  heirs  in  the  land  thereby  acquired 
attach  in  the  same  manner  as  if  the  land  had  been  conveyed 
in  the  lifetime  of  the  deceased  partner.  Rccd  v.  Whitney, 
7  Gray,  533. 

The  conclusion  to  which  we  have  come  is  in  the  direc- 
tion towards  which  all  the  decisions  upon  the  subject  hitherto, 
in  Massachusetts,  have  clearly  pointed.  It  is  sustained  by 
the  able  and  elaborate  opinion  of  Chancellor  Walworth,  in 
Buchan  v.  Sumner,  2  Barb.  Ch.  198;  by  the  case  of  Tillin- 


522         NATURE   OF  THE   ASSOCLVTES'   INTERESTS 

gJiast  V.  Champlin,  4  R.  I.   173-207;  and  by  several  other 
American  anthorities.     See  i  Am.  Lead.  Cas.  494. 

Tlie  real  estate  to  which  Leonard  B.  Shearer  would  be 
entitled  as  his  share  of  the  copartnership  property,  to  wit, 
that  which  has  been  designated  to  be  conveyed  or  released  to 
his  representatives,  will  therefore  be  conveyed  or  released 
to  his  heirs,  subject  to  liability  for  the  payment  of  his  pri- 
vate debts,  if  any,  and  subject  also  to  such  rights  of  dower 
as  Corinna  A.  Shearer  may  be  entitled  to  have  in  the  several 
parcels,  under  the  laws  which  exist  where  such  real  estate 
is  situated.  But  this  disposition  cannot  be  ordered  in  the 
present  suit,  which  seeks  a  conveyance  to  Corinna  A.  Shearer 
herself,  or  a  sale  for  the  purpose  of  placing  the  proceeds 
in  her  hands  as  administratrix.  It  is  a  proceeding  against 
the  heirs,  and  not  in  their  behalf.  The  bill  must  therefore 
be  dismissed. 


FOSTER'S  APPEAL  523 


FOSTER'S  APPEAL. 
In  the  Supreme  Court  of  Pennsylvania,  1873. 

74  Pennsylvania  Reforts,  391. 

Appeal  from  the  Orphans'  Court  of  Allegheny  County. 

Sharswood,  J. :  The  question  raised  upon  this  record 
may  be  thus  concisely  stated :  When  real  estate  has  been 
held  as  partnership  stock — the  firm  dissolved  by  the  death 
of  one  of  the  members — a  settlement  and  balance  ascer- 
tained to  be  due  by  the  surviving"  partner  to  the  estate  of 
the  deceased,  is  such  balance  as  far  as  derived  from  the  sale 
of  the  realty  to  be  distributed  as  real  or  personal  estate? 
The  appellant,  who  is  the  widow  of  John  Foster,  deceased, 
who  was  a  copartner  of  Samuel  M.  Kier  in  the  firm  of  Kier 
&  Foster,  claims  that  she  is  entitled  to  one-third  of  the  in- 
terest of  the  said  Foster,  as  ascertained  by  the  settlement, 
absolutely  as  personal  estate ;  the  decree  of  the  Court  below 
awards  it  to  her  for  life  only  as  realty.  The  firm  property 
at  the  time  of  Foster's  death  was  composed  both  of  lands 
and  movables.  They  were  engaged  in  the  mining  and  sell- 
ing of  coal.  The  appellant,  as  administratrix,  and  William 
W.  Young,  as  guardian  of  the  minor  children  of  John  Fos- 
ter, presented  a  petition  to  the  Orphans'  Court  of  Allegheny 
county,  setting  forth  ''that  at  the  time  of  his  death,  the 
said  John  Foster  was  an  equal  partner  with  Samuel  ]\I. 
Kier,  in  the  firm  of  Kier  &  Foster,  engaged  in  the  mining 
and  selling  of  coal,  the  property  of  the  said  firm  being  sit- 
uated in  the  county  of  Allegheny;  that  while  in  many  in- 
stances the  real  estate  belonging  to  the  said  firm  was  con- 
veyed to  them  as  tenants  in  common,  yet  the  same  was  really 
held  by  and  purchased  with  the  money  of  the  firm  as  part- 
nership property ;  that  the  said  firm  of  Kier  &  Foster  were 
largely  indebted ;  that  Kier,  the  surviving  partner,  had  pro- 
posed to  purchase  the  interest  of  Foster  for  the  sum  of 


524         XATURE   OF  THE   ASSOCIATES'    INTERESTS 

twenty-five  thousand  five  hundred  and  eight  dollars  and 
thirty  cents,  he,  the  said  Kier,  assuming  all  the  debts  and 
liabilities  of  the  firm ;  that  it  would  be  greatly  to  the  advan- 
tage of  all  interested  that  the  interest  of  Foster  should  be 
sold  at  private  instead  of  public  sale,  and  the  proposition  of 
Kier  accepted ;  that  they  unite  in  the  petition  for  the  pur- 
pose of  removing  any  question  which  may  arise  from  the 
fact  that  several  of  the  said  properties  have  been  conveyed 
to  the  said  John  Foster  and  Samuel  M.  Kier  as  tenants  in 
common,  and  not  expressly  as  partners."  Upon  this  peti- 
tion the  Orphans'  Court  decreed  a  private  sale  to  Samuel 
M.  Kier,  for  the  sum  named,  and  that  the  proceeds  of  sale 
be  treated  and  considered  as  the  proceeds  of  real  estate,  and 
accordingly  distributing  and  applying  the  purchase  money 
between  the  widow  and  heirs  of  decedent.  It  is  from  this 
latter  part  of  the  decree  that  this  appeal  is  taken. 

It  has  not  been  and  cannot  be  denied,  upon  the  ap- 
praisement and  settlement  of  the  partnership  debts  and  as- 
sets which  accompanies  the  petition,  that  after  discharging 
all  the  liabilities  of  the  firm,  the  interest  of  Foster  in  the 
lands  and  real  estate  which  formed  the  most  considerable 
portion  of  the  stock  was  fairly  represented  by  the  sum 
agreed  to  be  paid  for  his  entire  interest.  It  is  the  well  set- 
tled rule  in  marshalling  the  assets  of  a  decedent,  that  the 
personal  property  is  to  be  first  applied  in  the  payment  of 
debts.  The  general  principle  is  that  the  personal  estate  is 
the  proper  fund  for  that  purpose,  and  shall  be  first  applied 
even  to  the  payment  of  debts  with  which  the  real  estate  is 
charged:  Keysey's  Case,  9  S.  &  R.  71;  Walker's  Estate, 
3  Rawle  22^j;  Cadbury  v.  Duval,  10  Barr  273.  This  is  in- 
deed the  unbending  rule  of  our  statute  law,  for  no  order 
can  be  made  by  the  Orphans'  Court  authorizing  an  execu- 
tor or  administrator  to  make  sale  of  real  estate  for  the  pay- 
ment of  debts  unless  it  shall  appear  that  the  personal  assets 
are  insufficient  for  the  purpose:  Act  of  February  4th,  1834, 
sect.  20,  Pamph.  L.  80;  Act  of  March  29th,  1832,  sect.  31, 
Pamph.  L.   198.     It  is  true  that  it  may  often  happen  that 


FOSTER'S  APPEAL  525 

where  personal  property  is  used  in  connection  with  a  colH- 
ery  or  manufacturing  estabHshment,  it  is  very  much  for  the 
interest  of  all  parties  that  it  should  be  sold  together.  That 
is  a  difficulty  which  seems  inherent  in  the  subject — equally 
applicable  to  the  property  of  any  decedent — not  peculiar 
to  one  whose  proi)erty  is  an  interest  in  partnership  stock. 
It  seems  to  be  considered  as  well  settled,  that  where  land  is 
a  part  of  partnership  stock,  it  at  no  time — not  even  during 
the  continuance  of  the  partnership — becomes  personalty  in 
such  an  unqualified  sense  as  to  give  one  partner  an  implied 
power  to  dispose  of  the  whole  partnership  interest  in  it. 
As  regards  the  power  of  disposition,  land  held  as  partner- 
ship stock  is  not  subject  to  the  rule  which  makes  each  part- 
ner the  agent  of  the  firm.  Neither  can  sell  more  than  his 
own  undivided  interest,  unless  he  have  from  the  other  a 
sufficient  special  authority  for  the  purpose.  This  seems  to 
be  the  inevitable  result  of  the  Statute  of  Frauds,  both  as  to 
legal  and  equitable  interests  or  estates :  Murphy  v.  Hubert, 
7  Barr  423;  Andcrsun  v.  Tompkins,  i  Brock.  457;  Taplcy 
V.  Buttcrficid,  I  Mete.  515.  It  follows  that  the  surviving 
partner  could  not  sell  the  real  estate  in  conjunction  with 
the  personalty.  When  such  a  difficulty  presents  itself,  it 
must  be  met  either  by  a  separate  sale  of  the  personalty,  or 
in  the  mode  resorted  to  in  this  case.  Here  we  have  practi- 
cally no  difficulty  growing  out  of  the  necessary  intermixture 
of  realty  and  personalty. 

For  all  the  purposes  of  the  question  before  us,  this  case 
must  therefore  be  considered  the  same  as  if  after  dissolu- 
tion by  the  death  of  one  partner,  and  payment  of  all  ])art- 
nership  debts,  and  any  balance  due  the  surviving  partner, 
there  had  remained  in  specie,  unconverted,  land,  the  interest 
of  the  deceased  partner  in  which  is  ascertained  to  be  worth 
$25,508.30.  Is  the  land  thus  remaining  unconverted  and  in 
specie  to  be  regarded  for  the  purposes  of  distribution  under 
the  intestate  laws,  as  real  or  ])ersonal  ? 

This  is  an  entirely  new  question  in  this  state.  It  was 
supposed  to  arise  in  Meily  v.  JVood,  21  P.  F.  Smith  488, 


526         NATURE   OF  THE   ASSOCIATES'    INTERESTS 

but  this  court  thought  otliervvise,  and  distinctly  decHned  to 
express  any  opinion  upon  it.  A  careful  examination  of  all 
our  determinations  has  failed  to  discover  either  decision  or 
even  dictum  bearing  upon  the  point.  Even  Abbott's  Ap- 
peal, 14-  Wright  234,  which  has  been  pressed  upon  us  as  an 
authority,  is  inapplicable.  In  that  case,  although  the  bal- 
ance of  a  fund  in  court  arising  from  the  sale  of  partnership 
real  estate  on  an  execution  against  the  firm,  was  awarded 
to  the  surviving  partners  as  against  the  claim  of  one  of 
them  in  his  own  right,  and  as  the  executor  of  a  deceased 
partner,  to  aliquot  shares ;  yet  as  stated  in  the  decree,  these 
surviving  partners  were  "settling  the  business  of  the  firm," 
and  it  is  said  in  the  opinion  by  Mr.  Justice  Read,  that  "the 
business  of  the  firm,  dissolved  by  the  death  of  George  Ab- 
bott, has  ne^•er  been  finally  settled,  and  it  is  alleged  by  the 
appellees  that  the  firm  is  still  largely  indebted."  We  ap- 
proach the  determination  of  the  question,  therefore,  un- 
trammelled by  any  authority.  Nor  will  it  be  necessary  to 
pass  in  review  the  fluctuating  and  discordant  opinions  in 
England  and  our  sister  states.  We  are  saved  this  labor  by 
the  learned  and  exhaustive  opinion  of  Chancellor  Wal- 
worth, in  Biicliaii  v.  Sumner,  2  Barb.  Ch.  165.  We  are  at 
entire  liberty  to  resolve  this  important  and  interesting  prob- 
lem on  principle  and  reason. 

Conversion  is  altogether  a  doctrine  of  equity.  In  law 
it  has  no  being.  It  is  admitted  only  for  the  accomplishment 
of  equitable  results.  It  may  be  termed  an  equitable  fiction, 
and  the  legal  maxim  in  fictionc  juris  semper  subsistit  equi- 
tas  has  redoubled  force  in  application  to  it.  It  follows  of 
necessity,  that  it  is  limited  to  its  end.  Lord  Eldon  advanced 
this  idea  while  his  mind  was  evidently  laboring  and  in  sus- 
pense on  the  general  subject.  In  Ripley  v.  Watenvorth,  7 
Ves.  425,  he  said:  "There  is  an  obvious  difference  from  all 
the  cases,  which  establish  this  general  principle,  that  where 
a  person  dealing  upon  his  own  property  only,  has  directed  a 
conversion  for  a  particular  special  purpose,  or  out  and  out, 
but  the  produce  to  be  applied  to  a  particular  purpose,  when 


FOSTER'S  APPEAL  527 

the  purpose  fails,  the  intention  fails ;  and  this  court  regards 
him  as  not  having  directed  the  conversion."  There  must  be 
some  purpose  recognized  as  lawful  to  be  accomplished  by  a 
conversion,  before  equity  will  permit  it  to  have  place. 
Surely  it  will  not  be  pretended  that  a  man  could  by  a  mere 
declaration  of  record  convert  his  land  into  personalty,  so  as 
to  defeat  the  lien  of  mortgages,  judgments  and  other  en- 
cumbrances, elude  the  provisions  of  the  Statute  of  Frauds, 
and  change  the  course  of  distribution  in  case  of  intestacy. 
If,  however,  a  trust  is  created,  either  by  deed  or  will,  with 
an  absolute  direction  to  sell  and  distribute  the  proceeds 
either  among  creditors  or  others,  equity  considers  that  as 
actually  done  which  has  been  directed  to  be  done,  in  order 
to  accomplish  the  lawful  intent  of  the  grantor  or  testator. 
If  it  continued  land,  subject  as  such  to  sale,  mortgage  and 
encumbrance  by  the  eventual  distributees — the  present  ccs- 
tiiis  que  trust — the  result  aimed  at  might  be  defeated,  and 
the  intention  frustrated.  So  where  land  is,  by  the  agree- 
ment of  the  partners,  made  partnership  stock,  it  is  an  out- 
and-out  conversion  only,  because  otheTwise  the  objects  of 
the  partnership  would  be  defeated,  if  the  sale,  mortgage  or 
encumbrance  of  his  separate  interest  by  one  partner  could 
prevent  the  equity  of  the  other  partners  to  have  the  partner- 
ship property  applied  to  the  payment  of  the  partnership 
debts,  and  the  balances-  which  might  be  due  to  them  respect- 
ively. When  the  purpose  of  conversion  is  attained,  conver- 
sion ends,  or  more  accurately,  re-conversion  takes  place. 
Thus  when  the  sale  under  the  trust  is  made,  the  character 
of  personalty  does  not  follow  the  land  into  the  hands  of  the 
purchaser.  The  proceeds  are  personalty  and  are  distrib- 
uted at  such  among  the  ccsfnis  que  trust,  because  that  was 
the  very  object  of  the  conversion.  So  with  land  in  partner- 
ship when  sold  by  the  firm,  the  land  becomes  land  again  in 
the  hands  of  the  purchaser,  and  the  proceeds  personalty, 
but  personalty  to  what  extent?  Only  to  the  extent  of  ac- 
complishing the  purposes  of  the  conversion,  namely,  the 
equity  of  the  partners  to  have  the  joint  debts  and  their  own 


528         NATURE   OF  THE   ASSOCIATES"    INTERESTS 

advances  paid  before  any  part  goes  to  the  other  partners 
or  their  separate  creditors.  In  Dyer  v.  Cornell,  4  Barr  359, 
where,  by  order  of  the  Orphans'  Conrt,  the  land  of  minors 
was  sold  for  their  maintenance  and  education,  it  was  held 
that  the  proceeds,  supposing  them  to  retain  the  character  of 
land,  lose  that  and  become  personalty  on  the  first  transmis- 
sion, though  to  an  infant.  The  administrator  of  the  minor 
was  decided  to  be  entitled  to  the  money  as  money.  The 
Court,  indeed,  were  of  opinion  that  the  sale  ipso  faclo 
worked  a  transmutation,  but  they  added,  by  Coulter,  J., 
"But  even  admitting  that  the  money  in  this  case  bore  the 
impress  of  real  estate,  and  the  inheritable  qualities  peculiar 
to  lands  and  houses,  in  analogy  to  the  case  of  Lloyd  v.  Hart, 
2  Barr  473,  for  how  many  generations  or  descents  shall  it 
wear  that  complexion?  It  must  cease  as  it  mingles  with 
other  moneys  of  the  distributee,  otherwise  uncertainty,  con- 
fusion and  litigation  will  indelibly  mark  its  character.  This 
court  is  of  opinion  that  it  cannot  be  carried  further  than  the 
first  descent  in  any  case."  The  same  question  is  pertinent 
in  regard  to  the  land  in  the  present  case.  If  land,  remain- 
ing in  specie  after  the  partnership  is  dissolved  and  wound 
up,  and  all  the  purposes  of  its  conversion  answered,  is  still 
personal  estate,  how  long  is  it  to  remain  so?  Certainly  all 
the  forms  of  the  law  as  to  realty  must  be  observed  in  its 
transmission  from  hand  to  hand,  and  shall  it  not  be  subject 
to  the  lien  of  judgments  in  the  lifetime,  and  debts  upon  the 
decease  of  its  owner?  If  not,  uncertainty,  confusion  and 
litigation  will  indelibly  mark  its  character.  But  it  may  be 
asked,  when  is  the  precise  moment  of  its  reconversion? 
The  answer  is,  the  moment  the  partnership  is  wound  up, 
either  by  decree,  judgment  or  agreement,  and  it  is  deter- 
mined that  it  no  longer  forms  a  part  of  the  partnership 
stock,  and  is  not  required  for  its  purposes.  In  Burr  v.  Sim, 
I  Whart.  252,  where  land  was  ordered  to  be  converted  by 
will,  and  the  proceeds  to  be  paid  to  a  legatee,  it  was  held 
that  the  election  by  the  legatee  before  any  sale,  to  take  the 
land  as  land,  operated  as  a  new  acquisition.     It  was  a  pur- 


FOSTER'S  APPEAL  529 

chase  of  it  as  land  by  a  surrender  of  the  right  which  he  un- 
doubtedly had  to  consider  it  as  money.  Where,  then,  a 
partnership  is  dissolved,  wound  up,  and  completely  ended, 
what  can  it  be  but  an  election  of  the  land  as  land,  and  the 
reconversion  of  it  ? 

It  must  be  remarked,  also,  that  without  the  order  of 
the  Orphans'  Court  in  this  case,  the  legal  title  of  John  Fos- 
ter to  an  undivided  moiety  of  the  lands  could  not  have  been 
conveyed  to  Samuel  M.  Kier.  We  have  seen  that  this  is  a 
well  settled  point.  If  it  were  not  so,  the  appellant  as  ad- 
ministratrix might  have  assigned  it.  She  joined  in  the 
application  to  the  Court  with  the  guardian.  The  decree 
for  the  private  sale  was  under  the  provision  of  the  Act  of 
April  i8th,  1853,  sect.  4,  Pamph.  L.  505  ;  and  the  fifth  sec- 
tion of  that  act  has  declared  that,  in  all  cases  of  sale  ac- 
cording to  its  provisions,  "The  purchase  money  *  *  "^ 
shall  in  all  respects  be  substituted  for  the  real  estate  sold 
*  *  *  as  regards  the  enjoyment  and  ownership  thereof, 
after  tlie  payment  of  liens,  and  shall  be  held  for  or  applied 
to  the  use  and  benefit  of  the  same  persons,  and  for  the 
same  estate  and  interest  *  *  *  as  the  real  estate  sold 
had  been  held."  Under  the  express  provision  of  the  sta- 
tute, the  proceeds  of  the  real  estate  sold  under  this  order 
must  be  considered  as  of  the  same  character  as  the  land 
remaining  ///  specie  after  discharging  its  liabilities  as  part- 
nership stock.  On  the  whole,  then,  we  are  of  the  opinion 
that  the  appellant  was  only  entitled  to  an  interest  for  her 
life,  and  that  the  decree  of  the  Court  below  was  right. 

Decree  affirmed,  and  appeal  dismissed  at  the  costs  of 
the  appellant. 


530        NATURE   OF  THE   ASSOCIATES'   INTERESTS 


LEAF'S  APPEAL. 
In  the  Supreme  Court  of  Pennsylvania,  1884. 

105  Pennsylvania  Reports,  505. 

This  was  an  appeal  of  Richard  T.  Leaf  and  others 
from  a  decree  of  the  said  court,  sustaining  a  bill  in  equity 
for  an  account  filed  by  Emanuel  V.  Gerhart  against  the 
said  Richard  T.  Leaf  and  others,  and  decreeing  that  the 
said  defendants  pay  the  plaintiff  the  sum  of  $1,500  with 
interest.  Answers  were  filed,  and  the  court  appointed  Dan- 
iel H.  Wingerd,  Esq.,  examiner  and  master,  whose  findings 
of  fact  and  conclusions  of  law  were  as  follows : 

In  1852,  Frederick  S.  Hunter  and  others  entered  into 
a  partnership  for  the  purpose  of  manufacturing  pig  iron  at 
Leesport,  Pa.  Among  the  articles  of  copartnership  were 
the  following: 

"2.  The  furnace  property  in  Leesport,  real  estate  in 
and  about  Leesport,  and  all  other  stocks  and  properties 
necessary  for  the  safe  and  profitable  management  and 
enjoyment  of  tlie  business  heretofore  purchased  for  the 
l)artnership,  or  that  may  hereafter  be  purchased  or  construc- 
ted for  the  same,  shall  l^e  taken  and  held  as  partnership 
personal  property." 

"6.  The  firm  shall  not  be  dissolved  by  the  death,  with- 
drawal, failure  or  pleasure  of  any  of  its  members,  nor  in 
any'  way  but  by  the  consent  of  all  the  members  thereof. 
In  the  case  of  the  death  of  any  member,  his  legal 
representatives  shall  hold  his  property  and  interest,  in  the 
same  manner  and  subject  to  the  same  rights  and  liabilities 
as  the  deceased  partner  held  the  same,  and  may  sell  out  and 
withdraw  from  the  firm,  as  provided  in  the  case  of  with- 
drawal of  a  partner.  By  the  term  legal  representatives,  is 
understood  and  intended  the  person  or  persons  who  may 
be  made  such,  touching  this  property,  by  the  last  will  of  the 


LEAF'S  APPEAL  531 

member  deceased,  or  wlio  may  Ijecome  such,  under  the  in- 
testate laws  of  this  Commonwealth." 

When  this  coj^artnership  was  first  formed,  its  reaLes- 
tate  consisted  of  what  was  then  known  as  the  Darrah  Fur- 
nace Stack  and  several  acres  of  land  connected  therewith; 
but  other  real  estate  was  subsequently  purchased  from  time 
to  time  until  the  entire  holdings  by  the  partnership  aggre- 
gated about  270  acres,  upon  which  are  erected  houses,  barns 
and  various  other  kinds  of  buildings,  suitable  for  farming 
and  furnace  purposes.  All  the  real  estate  thus  acquired 
was  bought  for  the  use  of  the  partnership,  and  paid  for  out 
of  their  general  funds,  to  further  the  interests  of  the  firm, 
and  while  much  real  estate  was  acquired  which  was  not 
really  needed  for  the  manufacture  of  iron,  properly  speak- 
ing, some  part  of  each  purchase,  in  the  judgment  of  the 
partners,  was  needed,  for  the  l^etter  or  more  convenient 
management  of  the  main  business  of  the  firm;  and  what 
was  not  absolutely  necessary  for  that  purpose,  was  bought 
with  the  necessary  portion,  in  order  to  get  that  which  was 
needed. 

On  August  20,  1863,  Frederick  Hunter  died  intestate, 
possessed,  {)ifc}'  alia,  of  a  one-fifth  interest  in  said  partner- 
ship, and  leaving  surviving  him  a  widow,  Mary  M.  Hunter, 
and  three  children,  \\z.,  Nicholas  Hunter,  Lenora  C.  Leaf, 
wife  of  Richard  T.  Leaf,  and  Mary  M.  Flinn,  wife  of  J. 
Robinson  Flinn.  Letters  of  administration  on  his  estate 
were  duly  granted  to  \Vm.  H.  Clymer,  Esq. 

On  August  22,  1865,  the  widow  of  Frederick  S. 
Hunter  was  married  to  Emanuel  V.  Gerhart,  the  plaintift". 
and  on  July  18,  1866,  she  died.  By  her  last  will  and  testa- 
ment she  bequeathed  to  the  said  Emanuel  V.  Gerhart  "all 
the  ])ersonal  property  which  I  own  or  am  ])ossessed  of  at 
the  time  of  my  decease,  including  my  share  in  the  'Leesport 
Furnace  Property'  in  Berks  county,  Pennsylvania,  being 
one-third  of  one-fifth  thereof."  The  said  Emanuel  V.  Ger- 
hart, her  husband,  was  appointed  as  executor  in  the  will. 


532         NATURE   OF  THE   ASSOCIATES'   INTERESTS 

and  on  the  30th   day  of  Jul}-,    1866,   letters  testamentary 
were  issued  to  liim  accordingly. 

Thereafter  dividends  declared  by  the  partnership  were 
paid  to  him  from  time  to  time,  upon  the  said  one-third  of 
one-fifth  interest  until  the  last  dividend  declared  on  the 
8th  day  of  November,  1879,  and  payable  on  the  ist  day  of 
January,  1880,  when  the  children  of  Frederick  S.  Hunter 
made  objection  to  the  payment  of  the  same,  as  formerly, 
to  the  said  Emanuel  V.  Gerhart.  This  objection  was  put 
upon  the  ground  that  the  widow  of  Frederick  S.  Hunter 
had  only  a  dower  interest  in  the  one-third  of  his  share  in 
the  Leesport  Iron  Company,  and  that  therefore  the  same 
descended  to  them  as  his  heirs,  at  her  death,  and  did  not 
pass  by  her  last  will  to  the  said  Emanuel  V.  Gerhart,  and 
that  therefore  said  dividend  was  payable  to  them  as  such 
heirs. 

Thereupon  the  firm  declined  to  pay  the  said  dividends 
to  either  of  the  claimants,  and  this  bill  was  brought  by  the 
said  plaintiff  against  Richard  T.  Leaf,  ct  al.,  members  of 
said  firm  or  heirs  of  the  said  Frederick  S.  Hunter,  to  en- 
force payment  of  the  same  to  him  as  the  legatee  of  the 
widow  of  Frederick  S.  Hunter,  deceased. 

On  these  facts  the  auditor  reported  as  follows :  The 
English  authorities  incline  strongly  to  the  doctrine,  that 
real  estate  held  by  a  partnership  and  used  for  its  purposes, 
is  converted  into  personalty,  and  as  such  goes  to  the  per- 
sonal representatives  and  not  to  the  heir  at  law:  CoUycr 
on  Paiiiirrship,  Sees.  114-15,  and  cases  cited  in  notes.  In 
this  country  the  rule,  in  many  of  the  states  is  held  to  be 
different  from  the  English  doctrine,  though  there  is  conflict 
of  authority  on  the  subject,  and  in  this  state  the  decisions 
show  a  decided  tendency  toward  restricting  the  application 
of  the  equitable  doctrine  of  the  conversion  of  realty  held 
by  a  partnership  into  personalty,  and  to  admit  it  only  for 
the  accomplishment  of  equitable  results.  It  is,  however,  the 
well  settled  rule  in  Pennsylvania,  that  when  real  estate  is 
brought  into  the  partnership  business,  and   forms  part  of 


LEAPS  APPEAL  533 

its  stock,  it  is  considered  personalty,  and  as  converted  out 
and  out  for  all  purposes  of  the  partnership,  except  sale  and 
conveyance  under  the  Statute  of  Frauds:  Meily  v.  Wood, 
21  P.  F.  S.,  488;  Abbott's  Appeal,  14  Wright,  234;  Foster 
V.  Barnes,  31  P.  F.  S.,  T^yy;  Foster's  Appeal,  24  P.  F.  S., 

391- 

"In  the  case  before  us  there  can  be  no  doubt  that  all 

the  real  estate  acquired  by  the  partnership,  both  before  and 
after  the  death  of  Frederick  S.  Hunter,  formed  part  of  the 
assets  of  the  partnership,  as  the  recorded  agreement  so 
stated ;  the  conveyances  are  all  made  in  terms  for  the  use 
and  benefit  of  the  partnership,  and  the  evidence  is  that  all 
except  the  first  purchase  was  paid  for  out  of  the  profits  of 
the  partnership.  Certainly  then,  under  the  authority  of 
Foster's  Appeal,  24  P.  F.  Smith,  391,  and  the  facts  above 
stated,  it  must  be  held  that  in  this  case  there  was  an  out 
and  out  conversion  from  realty  to  personalty,  to  the  extent 
that  the  real  estate  held  by  the  partnership  was  not  subject 
to  lien  by  the  creditors  of  Frederick  S.  Hunter,  or  any  other 
individual  member  of  the  firm,  nor  to  sale,  mortgage,  or 
encumbrance  either  by  him,  or  any  one  else  who  succeeded 
to  his  interest  in  the  partnership,  but  remained  liable,  first, 
for  the  payment  of  all  partnership  debts,  and  secondly,  for 
the  payment  of  any  balances  which  might  be  due  to  the 
other  members  of  the  firm.  Under  the  same  authority  it  is 
equally  clear,  that  had  the  partnership  been  wound  up  and 
dissolved,  upon  the  death  of  Frederick  S.  Hunter,  all  its 
affairs  settled,  and  a  balance  ascertained  to  be  due  to  his 
estate,  such  balance,  arising  from  the  real  estate,  would 
have  been  re-converted,  as  no  longer  forming  a  part  of  the 
partnership  stock,  nor  required  for  its  purposes,  and  would 
have  descended  to  his  widow  and  children,  as  real  estate. 
But  in  the  case  before  us  the  partnership  could  not  be  dis- 
solved nor  its  affairs  wound  up,  by  the  death  of  Frederick 
S.  Hunter,  and  as  a  matter  of  fact,  it  was  not  wound  up  nor 
affected  in  any  way  tliereby ;  but  on  the  contrary  continued 
its  business  just  as  before  his  death,   and  his  interest  re- 


534        NATURE  OF  THE   ASSOCIATES'   INTERESTS 

mained  in  the  partnership  subject  to  all  its  purposes,  and 
was  represented  by  his  widow  and  the  guardians  of  his 
three  minor  children,  who  stood  in  his  stead  as  partners. 

"What  then  must  the  interest  of  Frederick  S.  Hunter 
be  considered  during  this  continuing  partnership  with  his 
widow  and  children,  either  by  their  guardian  or  themselves 
as  members  thereof,  and  with  their  entire  interests  subject 
to  the  equities  of  partnership  creditors  and  the  other  part- 
ners— whether  realty  or  personalty  for  the  purposes  of  de- 
scent? .  .  .  Indeed  it  does  not  appear,  though  the 
firm  paid  large  dividends,  how  much  would  have  remained 
for  distribution,  either  of  personalty  or  realty,  if  the  affairs 
of  the  firm  had  been  wound  up,  and  certainly  all  the  part- 
nership stock,  whether  realty  or  personalty  in  fact,  must 
remain  liable,  primarily,  for  all  partnership  obligations,  and 
be  considered  personalty  until  all  partnership  affairs  have 
been  fully  wound  up  and  settled.  In  Abbott's  Appeal,  14 
Wright,  234,  the  balance  of  a  fund  in  court  arising  from  a 
sale  of  partnership  real  estate  was  awarded  to  the  surviv- 
ing partners  as  against  the  claim  of  an  individual  partner 
in  his  own  right,  and  as  the  executor  of  another  deceased 
partner,  on  the  ground  that  the  affairs  of  the  firm  had  never 
been  finally  settled.     See  also  Foster's  Appeal,  24  P.  F.  S., 

391- 

"Now  applying  these  principles,  as  laid  down,  to  the 

case  in  hand,  we  conclude:  That  as  the  land  formed  a 
part  of  the  partnership  stock  it  was  converted  out  and  out, 
because  the  objects  of  the  partnership  required  it,  and  being 
converted  into  personalty  in  contemplation  of  law,  it  could 
not  be  reconverted  until  that  partnership  was  wound  up 
and  settled,  and  until  it  was  finally  determined  by  such  set- 
tlement, that  it  was  no  longer  required  for  the  purposes  of 
the  partnership.  But  the  partnership  in  question  never  has 
been  wound  up,  and  under  the  terms  of  the  agreement  its 
affairs  may  not  be  finally  settled  for  an  indefinite  period; 
nor  does  it  appear  but  that  the  entire  interest  of  which 
Frederick  S.  Hunter  died  seised,  may  in  the  future  be,  or 


LEAF'S  APPEAL  535 

might  at  any  time  heretofore  have  been,  required  for  the 
purposes  of  a  final  settlement  and  winding  up  of  the  part- 
nership affairs.  How  then  can  re-conversion  take  place  un- 
til the  equities  which  work  the  conversion  are  accomplished 
and  settled?  How  could  this  undefined  and  still  undefina- 
ble  interest  in  the  partnership  descend  as  real  estate,  and  as 
such,  be  chargeable  with  a  dower  interest  and  subject  to  all 
the  possibilities  of  sale,  mortgage,  or  incumbrance  by  those 
entitled  to  the  remainder,  without  interfering  with  the  equi- 
table rights  of  partnership  creditors  and  partners,  and  de- 
feating the  very  object  of  conversion?  All  the  partnership 
property  in  this  case  being  clearly  impressed  with  the 
character  of  personalty,  any  attempt  to  withdraw  that  char- 
acter from  it,  during  the  existence  of  the  parnership  or 
before  accomplishing  the  equitable  objects  for  whicli  the  con- 
version into  personalty  was  effected,  would  not  only  defeat 
those  objects,  but  lead  to  a  state  of  uncertainty  and  confu- 
sion respecting  the  rights  of  partners,  creditors  and  heirs, 
and  would,  in  the  opinion  of  the  master,  be  contrary  to 
sound  legal  principles.  It  may  be  noticed  further  that  as 
both  the  widow  and  children  of  Frederick  S.  Hunter  al- 
lowed their  several  interests  to  remain  in  the  partnership, 
and  thereby  became  partners  under  the  6th  clause  of  the 
agreement  above  quoted,  it  seems  impossible  to  escape  the 
conclusion  that  if  their  interest,  by  any  mode  of  reasoning, 
could  be  held  to  be  real  estate,  at  any  period  since  the  for- 
mation of  the  partnership,  re-conversion  into  personalty 
must  have  again  taken  place,  for  it  will  not  be  pretended 
that  those  interests,  or  any  of  the  others  in  the  partnership 
now,  may  be  considered  other  than  as  personalty  for  all 
equitable  purposes. 

"As,  therefore,  the  widow  took  her  portion  of  the 
interest  of  Frederick  S.  Hunter  in  the  partnership  as  person- 
alty, she  took  it  absolutely,  and  .  had  the  legal  right  to 
bequeath  it  to  Emanuel  V.  Gerhart,  the  plaintiff,  as  she  did. 
He,  by  virtue  of  the  provisions  of  the  6th  clause  of  the 
partnership  agreement,  elected  to  remain  in  the  partnership 


5.36         NATURE   OF  THE   ASSOCIATES'   INTERESTS 

and  become  a  partner,  and  is  consequently  entitled  to  be 
paid  his  proper  share,  according  to  his  interest,  of  all  divi- 
dends declared  by  the  partnership  since  the  death  of  the 
widow,  and  not  yet  paid  to  him." 

The  master  accordingly  recommended  that  the  bill  be 
sustained  in  accordance  with  the  prayer  of  the  plaintiff, 
-t.  -\:  -\:  Exceptions  filed  by  the  defendants  to  the  master's 
findings  of  fact  and  law  were  dismissed  by  the  court  and  the 
report  was  confirmed.  *  ''•  *  The  defendants  thereupon 
took  this  appeal.^ 

Mr.  Justice  Green  delivered  the  opinion  of  the  court, 
April  28,  1884. 

The  decree  made  by  the  learned  court  below  in  this 
case  merely  ordered  the  payment  of  the  sum  of  fifteen  hun- 
dred dollars  by  the  defendant  to  the  plaintiff,  as  his  full 
share  of  a  dividend  of  profits  declared  in  1879.  There  was 
no  decree  of  dissolution  of  the  partnership  asked  for  in  the 
bill  or  made  by  the  court ;  there  was  no  final  account  nor 
any  winding  up  of  the  affairs  of  the  partnership.  Of  course 
there  was  no  adjudication  either  of  the  status  of  the  parties 
or  of  their  respective  rights  to  the  property  of  the  partner- 
ship, as  upon  a  final  settlement  and  distribution  of  the  prop- 
erty and  assets  of  the  partnership.  The  money  ordered  to 
])e  paid  was  a  share  of  a  dividend  of  the  current  profits  of 
the  firm.  The  profits  realized  from  the  business  were  of 
course  personal  property  in  any  aspect  of  the  case.  They 
represent,  not  the  mere  product  of  real  estate  distinctively 
as  such,  but  of  a  business,  to  wit,  the  manufacture  and  sale 
of  pig  iron.  Such  a  business  is  perhaps  quite  as  largely  the 
result  of  a  dealing  with  money  and  personal  chattels  as 
with  real  estate.  In  this  case  the  furnace  and  lands  occupied 
in  conducting  .the  business  were  owned  by  the  members  of 
the  firm,  and  to  the  extent  of  their  use  they  contrilmted  to 
the  general  result  of  profits  earned. 

The  partnership  in  which  the  parties  plaintiff  and  de- 


'  The  facts  as  slated  by  the  Reporter  are  slightly  abbreviated,  and 
his  notes  of  the  arguments  of  counsel  omitted. 


LEAF'S  APPEAL  537 

fendants  were  interested,  was  a  continuing  one  which  com- 
menced in  1852,  and  which  has  never  yet  been  dissolved. 
No  question  as  to  the  uUimate  ownership  of  the  real  estate 
of  the  firm,  after  a  dissolution  has  taken  place,  arises  upon 
the  present  record.  The  articles  of  copartnership  contained 
an  express  provision  that  the  firm  should  not  be  dissolved 
by  the  death,  withdrawal,  failure  or  pleasure  of  any  of  its 
members,  nor  in  any  way  but  by  the  consent  of  all  the  mem- 
bers thereof.  A  method  of  continuing  the  partnership 
after  the  death  of  a  member  is  also  provided.  That  such 
stipulations  are  perfectly  valid  and  binding  cannot  be 
doubted:  Story  on  part..  Sees.  196  to  201  ;  Grot::  v.  Bayard, 
II  S.  &  R.,  46;  Laughlin  v.  Loren::,  12  Wr.,  282,  and  au- 
thorities cited  by  Agnew,  J.,  on  p.  283. 

In  the  present  case,  in  addition  to  the  provision  for  a 
continuance  of  the  partnership  after  the  death  of  a  mem- 
ber, there  is  also  a  stipulation  that  the  furnace  and  lands  of 
the  firm  shall  be  held  as  personal  property.  In  point  of 
fact  the  real  estate  of  the  firm  was  accjuired  with  partner- 
ship funds  and  used  for  partnership  purposes.  In  every 
view  of  the  case  so  far  as  any  question  which  now  arises  is 
concerned,  during  the  continuance  of  the  partnership  agree- 
ment, all  the  property  of  the  firm  must  be  regarded  as  per- 
sonal estate.  Certainly  this  must  be  so  as  to  mere  dividends 
of  profits  earned  in  carrying  on  the  business.  We  cannot 
declare  the  partnership  contract  at  an  end,  nor  can  we  dis- 
solve the  firm,  or  deal  Avith  its  assets  as  though  it  were 
dissolved,  by  any  order  which  it  would  be  possible  for  us 
to  make  in  this  proceeding.  We  have  considered  the  very 
able  argument  of  the  learned  counsel  for  the  appellants 
with  great  care,  but  we  are  not  convinced  that  it  is  applica- 
ble to  the  present  situation  in  its  leading  points.  The  de- 
cision in  Foster's  Appeal,  24  P.  F.  Smith,  391,  much  relied 
upon  for  the  a])pellants,  is  predicated  of  a  dissolved  firm, 
with  all  its  debts  paid,  and  a  residuum  of  unconverted  land 
remaining  in  specie  for  mere  purposes  of  distribution.  But 
there  are  no  such  facts  here.     It  cannot  now  be  known  that 


538        NATURE  OF  THE  ASSOCIATES'   INTERESTS 

the  real  estate  will  not  be  required  for  the  payment  of  debts. 
The  firm  still  continues  its  business  under  a  lawful  agree- 
ment to  that  effect.  Whenever  a  dissolution  shall  be  estab- 
lished, and  a  final  settlement  of  accounts  shall  take  place, 
the  positions  contended  for,  and  the  reasoning  by  which 
they  are  enforced,  will  become  entirely  applicable,  and  will 
exercise  a  very  potent,  and  possibly  a  controlling  influence, 
upon  the  questions  which  will  then  arise  between  the  pres- 
ent litigants  or  those  who  may  succeed  them.  But  upon 
the  present  state  of  the  record  we  think  the  appellee  is 
clearly  entitled  to  the  dividend  in  question  as  the  successor 
to  his  deceased  wife's  title. 

Decree  affirmed  at  the  cost  of  the  appellants. 


RUSSELL  V.  TEMPLE  539 


SECTION  2.— CORPORATION   CASES. 


RUSSELL  V.  TEMPLE. 

In  the  Supreme  Judicial  Court  of  Massachusetts, 

1798. 

3  Dane's  Abridgment,  108. 

In  this  case  the  heirs  of  Thomas  Russell  contended  that 
his  shares  in  Maiden,  Charles  River,  Haverhill,  Andover, 
and  Merrimack  bridges,  in  Middlesex  canal  &c.,  ought  to 
be  considered  as  real  estate,  and  his  widow,  afterwards  mar- 
ried to  Temple,  ought  to  have  only  her  dower  for  life  in 
them.  On  the  other  hand.  Temple  and  wife  contended  they 
were  personal  estate,  and  ought  to  be  distributed  as  such,  and 
she  have  one-third  part  forever.  The  strongest  case  among 
these,  in  favor  of  real  estate,  was  the  Middlesex  canal,  in 
which  the  corporation  had  a  fee  simple  estate,  or  an  estate 
forever,  and  a  perpetual  toll.  By  the  statutes  passed  respect- 
ing this  canal  and  real  estate,  the  property  therein  was  di- 
vided into  800  shares,  and  the  shares  in  the  canal,  including 
the  towing  paths  and  wharves  thereon,  were  made  trans- 
ferable and  taxable  as  personal  estate.  This  corporation 
also  had  power  to  hold  real  estate  to  the  amount  of  £30,000, 
over  and  above  the  canal  itself,  and  this  appendant  real  estate 
was  made  taxable  as  real  estate  of  the  corporation  in  the 
several  towns  in  which  it  lay.  It  was  argued  (for  the 
widow)  that  these  shares  were  personal  estate  for  two  rea- 
sons: I  St.  Because  these  estates  can  only  exist  in  the  cor- 
poration, which  alone  can  ac(|uire  it,  alone  be  seized  or  pos- 
sessed of  it,  alone  pass  it  away,  manage  or  repair  it,  and 
so  must  hold  it  entire ;  and  that  the  corporation  is  a  moral 
person  to  all  the  purposes  of  property.  Its  tenure  is  to  their 
successors,  or  to  their  successors  and  assigns;  these  estates 
never  can  vest  in  or  be  divided  among  the  individual  mem- 


5-^0         XATURE   OF  THE   ASSOCIATES'    INTERESTS 

bers,  to  liokl  as  tenants  in  common  &c.,  in  their  private  ca- 
pacities. Only  the  corporation  can  forfeit  the  estate,  and 
that  only  by  forfeiting  their  charter;  and  only  the  corpora- 
tion can  be  taxed  for  it  on  common  law  principles;  and  on 
these  can  it  alone  be  taken  in  execution  for  the  debts  of  the 
corporation;  and  on  a  dissolution  of  the  corporation,  "its 
lands  revert  to  the  grantor,  or  his  heirs,  and  the  debts  due  to 
or  from  it  are  totally  extinguished ;  so  that  the  members  of 
it  cannot  recover  or  be  charged  with  them  in  their  natural 
capacities."  And  a  grant  to  a  corporation  can  only  be  for 
its  life  or  continuance.  2  Bl.  Com.  484;  i  Lev.  239;  i  Bac. 
Al)r.  510.  Second.  Because  the  share  is  personal  estate, 
though  the  corporation  hold  real  estate ;  for  the  individual 
member  has  no  estate,  but  only  a  right  to  such  dividends 
as  the  corporation,  from  time  to  time,  assign  to  him.  He  is 
unknown  on  the  grants  made  to  it,  and  he  cannot  grant  any 
part  of  the  estate ;  nor  can  he  be  taxed  for  it  but  by  statute 
law ;  nor  can  any  private  member  of  a  corporation  be  dis- 
trained for  a  public  concern  of  it ;  his  only  remedy  for  his 
dividend  is  case  in  assumpsit,  or  an  action  on  the  case  for 
a  wrongful  refusal  or  neglect  to  pay  or  allow  him  his  part 
of  the  profits.  4  Wood's  Con.  489,  &c. ;  Cowp.  85  ;  Impey's 
Modern  Pleader  83;  i  Vent.  351 ;  Dutch  v.  Warren;  i  Stra. 
406;  same  case  2  Burr.  loii. 

So  lands  may  be  real  estate  in  one,  'yet  the  trees 
or  corn  growing  on  them  may  be  personal  estate  in  another. 
Lifford's  Case,  6  Co.  46  to  50;  Imp.  M.  P.  167. 

For  the  heirs,  it  was  urged  that  these  shares  were 
real  estate;  because  it  was  said  the  estates  were  real  in  the 
corporations;  annexed  to  the  soil;  and  that  if  these  Estates 
in  the  corporations  were  real,  the  estates  of  the  individual 
members  in  them  followed  their  nature,  and  were  real ;  and 
that  the  frequent  declarations  of  the  legislature  declaring 
such  shares  personal  estate,  at  least  shew  a  doubt :  that  when 
one  has  a  right  to  receive  rent,  he  has  only  a  right  to  receive 
a  sum  of  money;  yet  it  does  not  follow  that  his  estate  is 
not  real  estate,  out  of  which  his  rent  issues.     The  judgment 


RUSSELL  V.  TEMPLE  541 

of  the  court  was,  that  these  shares  were  personal  estate, 
and  distribution  was  ordered  accordingly.  The  principal 
reason  of  the  decision  appears  to  be,  because  the  court  con- 
sidered that  the  individual  member,  or  share-holder,  had  only 
a  right  of  action  for  a  sum  of  money,  his  part  of  the  net 
profits,  or  dividends.  And  so  the  law  has  been  held  to  be 
since  this  decision  was  made. 


542        NATURE  OF  THE  ASSOCIATES'   INTERESTS 


TISDALE  V.  HARRIS. 

In  the  Supreme  Judicial  Court  of  Massachusetts, 

1838. 

20  Pickering's  Reports,  9. 

Assumpsit  by  the  plaintiff,  an  inhabitant  of  New  York, 
against  the  defendant,  a  merchant  of  Boston,  on  a  contract 
alleged  to  have  been  made  in  October,  1835,  by  which  the 
defendant  agreed  to  sell  to  the  plaintiff  two  hundred  shares, 
with  all  the  earnings  thereon,  in  the  capital  stock  of  the  Col- 
lins Manufacturing  Company,  a  corporation  established  in 
Connecticut,  at  $10.80  per  share,  the  par  value  being  $10 
per  share.  The  object  of  the  suit  was  to  recover  $300,  being 
the  amount  of  a  dividend  of  15  per  cent  on  the  two  hundred 
shares,  declared  on  the  7th  of  October,  1835,  ^^^  payable 
on  the  15th. 

At  the  trial  the  plaintiff  introduced  parole  evidence  to 
prove  the  contract.  A  verdict  was  returned  for  the  plaintiff, 
which  the  defendant  moved  to  set  aside,  one  two  grounds, 
one  of  which  being  that  the  contract  set  up  was  within  the 
Statute  of  Frauds.^ 

Shaw,  C.  J. :  But  by  far  the  most  important  question  in 
the  case,  arises  on  the  objection,  that  the  case  is  within  the 
statute  of  frauds.  This  statute,  which  is  copied  precisely 
from  the  English  statute,  is  as  follows.  "No  contract  for  the 
sale  of  goods,  wares  or  merchandise  for  the  price  of  ten 
pounds  (33.33)  or  more,  shall  be  allowed  to  be  good,  except 
the  purchaser  shall  accept  part  of  the  goods  so  sold,  and 
actually  receive  the  same  or  give  something  in  earnest  to 
bind  the  bargain,  or  in  part  payment,  or  that  some  note  or 
memorandum  in  writing  of  the  said  bargain,  be  made  and 


'  Only  so  much  of  the  facts  of  the  case  as  stated  by  the  Reporter, 
and  the  opinion  of  the  Court  as  relate  to  the  fact  of  the  case  are 
reprinted. 


TISDALE  V.  HARRIS  543 

signed  by  the  parties  to  be  charged  by  such  contract,  or 
their  agent,  thereunto  lawfully  authorized." 

This  being  a  contract  for  the  sale  of  shares  in  an  in- 
corporated company  in  a  neighboring  State,  for  the  price 
of  more  than  ten  pounds,  and  no  part  having  been  delivered, 
and  no  purchase  money  or  earnest  paid,  the  question  is, 
whether  it  can  be  allowed  to  be  good,  without  a  note  or 
memorandum  in  writing,  signed  by  the  party  to  be  charged 
with  it.  This  depends  upon  the  Cjuestion,  whether  such 
shares  are  goods,  wares  or  merchandise  within  the  true 
meaning  of  the  statute. 

It  is  somewhat  remarkable  that  this  question,  arising 
on  the  St.  29  Car.  2,  in  the  same  terms,  which  ours  has  cop- 
ied, has  not  been  definitely  settled  in  England.  In  the  case 
of  Pickering  v.  Appleby,  Com.  Rep.  354,  the  case  was 
directly  and  fully  argued,  before  the  twelve  judges,  who  were 
equally  divided  upon  it.  But  in  several  other  cases  after- 
wards determined  in  Chancery,  the  better  opinion  seemed 
to  be,  that  shares  in  incorporated  companies,  were  within 
the  statute,  as  goods  or  merchandise.  Mussell  v.  Cooke, 
Prec.  in  Ch.  533 ;  Crull  v.  Dodson,  Sel.  Cas.  in  Ch.  41. 

We  are  inclined  to  the  opinion,  that  the  weight  of  au- 
thorities, in  modern  times,  is,  that  contracts  for  the  sale  of 
stocks  and  shares  in  incorporated  companies,  for  more  than 
ten  pounds,  are  not  valid,  unless  there  has  been  a  note  or 
memorandum  in  writing,  or  earnest  or  part  payment.  4 
Wheaton,  89,  note ;  3  Starkie  on  Evid.  4th  Amer.  Edit.  608. 

Supposing  this  a  new  question  now  for  the  first  time 
calling  for  a  construction  of  the  statute,  the  Court  are  of 
opinion,  that  as  well  by  its  terms,  as  its  general  policy,  stocks 
are  fairly  within  its  operation.  The  words  "goods"  and 
"merchandise,"  are  both  of  very  large  signification.  Bona, 
as  used  in  the  civil  law,  is  almost  as  extensive  as  personal 
property  itself,  and  in  many  respects  it  has  nearly  as  large 
a  signification  in  the  common  law.  The  word  "merchan- 
dise" also,  including  in  general,  objects  of  traffic  and  com- 


544         NATURE   OF  THE   ASSOCIATES'    INTERESTS 

merce,  is  broad  enough  to  include  stocks  or  shares  in  incor- 
porated companies. 

There  are  many  cases  indeed  in  which  it  has  been  held 
in  England,  that  buying  and  selling  stocks  did  not  subject 
a  person  to  the  operation  of  the  bankrupt  laws,  and  thence 
it  has  been  argued  that  they  cannot  be  considered  as  merchan- 
dise, because  bankruptcy  extends  to  persons  using  .the  trade 
of  merchandise.  But  it  must  be  recollected  that  the  bank- 
rupt acts  were  deemed  to  be  highly  penal,  and  coercive,  and 
tended  to  deprive  a  man  in  trade  of  all  his  property.  But 
most  joint  stock  companies,  were  founded  on  the  hypothesis 
at  least,  that  most  of  the  shareholders  took  shares  as  an  in- 
vestment and  not  as  an  object  of  traffic;  and  the  construction 
in  question  only  decided,  that  by  taking  and  holding  such 
shares  merely  as  an  investment,  a  man  could  not  be  deemed 
a  merchant  so  as  to  subject  himself  to  the  highly  coercive 
process  of  the  bankrupt  laws.  These  cases,  therefore,  do 
not  bear  much  on  the  general  question. 

The  main  argument  relied  upon,  by  those  who  contend 
that  shares  are  not  within  the  statute,  is  this.  That  statute 
provides  that  such  contract  shall  not  be  good  &c.,  among 
other  things,  except  the  purchaser  shall  accept  part  of  the 
goods.  From  this  it  is  argued,  that  by  necessary  implication, 
the  statute  applies  only  to  goods,  of  which  part  may  be  de- 
livered. This  seems  however  to  be  rather  a  narrow  and 
forced  construction.  The  provision  is  general,  that  no  con- 
tract for  the  sale  of  goods  &c.  shall  be  allowed  to  be  good. 
The  exception  is,  when  part  are  delivered;  but  if  part  can- 
not be  delivered,  then  the  exception  cannot  exist  to  take  the 
case  out  of  the  general  prohibition.  The  provision  extended 
to  a  great  variety  of  objects,  and  the  exception  may  well  be 
construed  to  apply  only  to  such  of  those  objects  to  which 
it  is  applicable,  without  affecting  others,  to  which  from  their 
nature  it  cannot  apply. 

There  is  nothing  in  the  nature  of  stocks,  or  shares  in 
companies,  which  in  reason  or  sound  policy  should  exempt 
contracts  in  respect  to  them  from  those  reasonable  restric- 


TISDALE  V.  HARRIS  545 

tions,  designed  by  the  statute  to  prevent  frauds  in  the  sale 
of  other  commodities.  On  the  contrary,  these  companies 
have  become  so  numerous,  so  large  an  amount  of  the"  prop- 
erty of  the  community  is  now  invested  in  them,  and  as  the 
ordinary  indicia  of  property,  arising  from  delivery  and  pos- 
session, cannot  take  place,  there  seems  to  be  peculiar  reason 
for  extending  the  provisions  of  this  statute  to  them.  As 
they  may  properly  be  included  under  the  terms  goods,  as 
they  are  within  the  reason  and  policy  of  the  act,  the  Court 
are  of  opinion,  that  a  contract  for  the  sale  of  shares,  in  the 
absence  of  the  other  requisites,  must  be  proved  by  some 
note  or  memorandum  in  writing;  and  as  there  was  no  such 
memorandum  in  writing,  in  the  present  case,  the  plaintiff  is 
not  entitled  to  maintain  this  action.  As  to  the  argument, 
that  here  was  a  part  performance,  by  a  payment  of  the  money 
on  one  side,  and  the  delivery  of  the  certificate  on  the  other, 
these  acts  took  place  after  this  action  was  brought,  and  can- 
not therefore  be  relied  upon  to  show^  a  cause  of  action  when 
the  action  was  commenced. 

Verdict  set  aside  and  plaintiff  nonsuit.- 


"Couiparc  the  following  discussion  in  Humble  V.  Mitchell,  ii  Adol- 
phus  and  Ellis,  205,  1839.  The  question  was  whether  a  contract  for  the 
sale  of  shares  in  an  English  joint  stock  hanking  property  was  a  contract 
falling  under  the  17th  Section  of  the  Statute  of  Frauds.  The  company 
was  a  partnership  with  transferahle  shares.  Cresswell  and  Crompton 
for  the  plaintiff:  "There  is  an  essential  difference  between  the  language 
of  Sec.  72  of  the  Bankrupt  Act,  6  G.  4,  c.  16,  and  of  Sec.  17  of  the 
Statute  of  Frauds.  The  words  of  the  former  are  'goods  and  chattels;' 
those  of  the  latter  are  'goods,  wares,  and  merchandizes.'  The  word 
'chattel'  is  more  comprehensive  than  any  word  used  in  the  Statue  of 
Frauds,  and  has  been  construed  to  include  debts,  bills,  bonds,  policies  of 
insurance,  and  shares  in  a  joint  stock  company,  all  of  which  pass  to  the 
assignees  when  in  the  possession,  order,  or  disposition  of  the  bankrupt ; 
HornhloK'cr  v.  Proud  [2  B.  &  Aid.  2)^7].  Here  no  stock,  goods,  or 
tangible  property  passed  to  the  plaintiff,  but  only  a  right  to  participate 
in  the  partnership  profits,  from  whatever  source  those  profits  might  be 
derived.  A  mere  right  of  action  is  a  chattel  within  the  Bankrupt  Act; 
but  the  merchandizes  within  the  meaning  of  the  Statute  of  Frauds  must 
be  such  as  are  capable  of  part  delivery.  The  owner  of  a  share  is  not 
necessarily  entitled  to  any  of  the  real  or  personal  estate  or  property  of 
the  company;  or,  if  he  is,  the  defendant  has  not  proved  it." 

Lord  Denman,  C.  J. :  "The  other  point  is  whether  the  shares  in  this 
company  are  goods,  wares,  or  merchandizes,  within  the  meaning  of  Sec. 
17  of  the  Statute  of  Frauds.  It  appears  that  no  case  has  been  found 
directly  in  point :  but  it  is  contended  that  the  decisions  upon  reputed 
ownership    are    applicable,    and    that    there    is    no    material    distinction 


546        NATURE   OF  THE   ASSOCIATES'   INTERESTS 

between  the  words  used  in  the  Statute  of  Frauds  and  in  the  Bankrupt 
Act.  I  think  tliat  both  the  language  and  the  intention  of  the  two  acts 
are  cbstingiiishalilc,  and  that  the  decisions  upon  the  latter  act  cannot  be 
reasonably  extended  to  the  Statute  of  Frauds.  Shares  in  a  joint  stock 
company  like  this  are  mere  choses  in  action,  incapable  of  delivery,  and 
not  within  the  scope  of  the  17th  Section.  A  contract  in  writing  was 
therefore  unnecessary." 

In  this  opinion  Patterson,  Williams  and  Coleridge,  JJ.,  concurred. 


CHAPTER  X 


VOLUNTARY  AND  INVOLUNTARY  ALIEN- 
ATION  OF  INTERESTS   IN  THE 
COMMON    PROPERTY. 


SECTION  I.— PARTNERSHIP  CASES. 


HEYDON  V.  HEYDON. 
In  the  Court  of  King's  Bench,  1693. 

I  Salkeld's  Reports,  392. 

Coleman  and  Heydon  were  co-partners,  and  a  judg- 
ment was  against  Coleman,  and  all  the  goods  both  of  Cole- 
man and  Heydon  were  taken  in  execution :  And  it  was 
held  by  Holt,  C.  J.,  and  the  Court,  that  the  sheriff  must 
seize  all,  because  the  moieties  are  undivided,  for  if  he  seize 
but  a  moiety,  and  sell  that,  the  other  will  have  a  right  to  a 
moiety  of  that  moiety ;  but  he  must  seize  the  whole,  and 
sell  a  moiety  thereof  undivided,  and  the  vendee  will  be  ten- 
ant in  common  with  the  other  partner. 


(547) 


548        ALIENATION  OF  INTERESTS  IN   PROPERTY 


EDDIE  v.  DAVIDSON. 
In  the  Court  of  King's  Bench,  1781. 

Douglas's  Reports,  627. 

The  defendant  was  partner  with  one  Birnie,  against 
whom  a  commission  of  bankrupt  had  issued,  but  before  the 
bankruptcy,  the  plaintiff  had  sued  out  execution  on  a  bond 
of  the  defendant's,  for  700/.  and  the  sheriff  had  levied  on 
the  partnership  effects.  Birnie's  assignees  obtained  this 
rule,  to  show  cause  why  the  sheriff  should  not  pay  them 
a  moiety  of  the  money  arising  from  the  sale  of  the  goods  so 
taken  in  execution,  upon  an  affidavit  of  Birnie's,  that  he  was 
entitled  to  an  equal  share  of  the  partnership  effects,  as  part- 
ner with  Davidson.  The  plaintiff's  affidavit,  on  showing 
cause,  denied  that  Birnie  had  an  equal  share  in  the  partner- 
ship effects,  and  stated  that  he  had  embezzled  the  joint  stock 
to  a  considerable  amount. 

The  court  directed  that  it  should  be  referred  to  the  Mas- 
ter to  take  an  account  of  the  share  of  the  partnership  effects 
to  which  Birnie  was  entitled ;  and  that  the  sheriff  should  pay 
a  part  of  the  money  levied,  equal  to  the  amount  of  such 
share,  to  the  assignees. 


TAYLOR  V.  FIELDS  549 


TAYLOR  V.  FIELDS. 
In  the  Court  of  Exchequer,  1799. 

4  I'cscy.  Junior's  Reports,  395. 

The  point  in  this  cause  depended  upon  the  general  ques- 
tion, whether  a  separate  creditor  of  one  partner  can  hold  the 
partnership  effects,  taken  under  an  execution  for  his  sepa- 
rate debt,  against  the  joint  creditors  of  the  partnership. 

At  the  time  the  execution  took  place  the  partnership  was 
insolvent ;  but  a  commission  of  bankruptcy  had  not  then  is- 
sued. 

Sir  Archibald  MacDonald,  Chief  Baron,  delivered  the 
opinion  of  the  Court. 

The  right  of  the  separate  creditor  under  the  execution 
depends  upon  the  interest,  each  partner  has  in  the  joint  prop- 
erty. With  respect  to  that  we  are  of  opinion,  that  the  Corpus 
of  the  partnership  effects  is  joint  property ;  and  neither  part- 
ner separately  has  any  thing  in  that  Corpus;  but  the  interest 
of  each  is  only  his  share  of  what  remains,  after  the  partner- 
ship accounts  are  taken. 

In  Skipp  V.  Hanvood,  [i  Ves.  239,  by  the  name  of 
IVcsf  V.  Skip:  2  Swanst.  586],  we  see,  that  whatever  the 
right  of  the  partnership  may  be,  it  is  not  affected  by  what 
may  happen  between  the  individual  partners.  There  is  a  dis- 
tinction between  the  rights  of  the  partners  and  the  rights  of 
the  partnership.  As  between  one  partner  and  the  separate 
creditors  of  the  other  they  cannot  affect  the  joint  stock  any 
farther  than  that  partner,  whose  creditors  they  are,  could 
have  affected  it.  In  Po.v  v.  Hauhury,  Cowp.  445.  Lord 
Mansfield  was  led  to  the  consideration  of  a  point,  that  bears 
much  upon  this  case ;  and  adverting  to  the  case  of  Skipp 
V.  Hanvood  he  states  a  passage  of  Lord  Hardwicke's  judg- 
ment from  his  own  note  rather  stronger  than  it  appears  in 
the  Report:     "If  a  creditor  of  one  partner  takes  out  execu- 


550        ALIENATION  OF  INTERESTS  IN  PROPERTY 

tion  against  the  partnership  effects,  he  can  only  have  the 
nndivided  share  of  his  debtor;  and  must  take  it  in  the  same 
.  manner  the  debtor  himself  had  it,  and  subject  to  the  rights 
of  the  other  partner." 

What  is  the  manner,  in  which  the  debtor  himself  had 
it?  He  had  that,  which  was  undivided,  and  could  only  be 
divided  by  first  delivering  the  effects  from  the  partnership 
debts.  He  who  comes  in  as  his  companion,  as  joint  tenant 
with  him,  according  to  this  doctrine  of  Lord  Hardwicke 
must  take  it  in  the  same  manner  the  debtor  himself  had  it, 
subject  to  the  rights  of  the  other  partners. 

Lord  Mansfield  having  stated  what  according  to  the 
course  of  the  Common  Law,  as  far  as  it  respects  trade  be- 
tween partners,  is  the  rule,  that  a  creditor  taking  out  execu- 
tion against  a  partner  is  directly  in  the  place  of  the  partner 
debtor,  proceeds  to  show,  that  by  the  same  rule,  where  a 
partner  becomes  bankrupt,  the  assignees  are  put  in  the  place 
of  the  partner,  in  whose  right  they  come  in,  and  by  no 
means,  as  was  argued  by  Mr.  Plumer,  by  any  rule  arising 
out  of  the  bankrupt  laws;  for  nothing  is  said  in  any  one  of 
those  Acts  as  to  the  creditors  of  a  partnership  and  the  sep- 
arate creditors  of  one  partner.  But  the  same  Common 
Law  applied  in  the  case,  where  one  partner  becomes  a  bank- 
rupt, provides,  that  the  assignee  of  the  bankrupt  shall  be 
in  the  same  situation  as  that,  in  which  a  creditor  taking  out 
execution  stood  before  those  Acts.  This  introduces  all  the 
cases  of  bankruptcy ;  which  Mr.  Plumer  wished  to  exclude, 
as  not  applicable  to  a  case,  in  which  there  was  no  bank- 
ruptcy;  and  this  case  is  to  be  considered,  as  if  no  bank- 
ruptcy had  taken  place ;  as  the  execution  was  before  the 
bankruptcy.  In  law  there  are  three  relations:  first,  if  a 
person  chooses  for  valuable  consideration  to  sell  his  inter- 
est in  the  partnership  trade;  for  it  comes  to  that;  or  if  his 
next  of  kin  or  executors  take  it  upon  his  death ;  or  if  a 
creditor  takes  it  in  execution,  or  the  assignees  under  a  com- 
mission of  bankruptcy.  The  mode  makes  no  difference: 
but  in  all  those  cases  the  application  takes  place  of  the  rule, 


TAYLOR  V.  FIELDS  551 

that  the  party  coming  in  the  right  of  the  partner  comes 
into  nothing  more  than  an  interest  in  the  partnership,  wlijch 
cannot  be  tangible,  cannot  be  made  available,  or  be  deliv- 
ered, but  under  an  account  between  the  partnership  and  the 
partner ;  and  it  is  an  item  in  the  account,  that  enough  must 
be  left  for  the  partnership  debts. 

A  great  deal  has  been  said  of  the  inconvenience.  What 
is  the  inconvenience?  It  is  true,  the  individual  trusted  to 
the  partnership  fund  in  his  idea  at  the  time  he  was  lending 
the  money :  not  that  I  believe,  that  is  very  common.  But 
it  may  be  dangerous  in  a  thousand  instances  to  have  any 
thing  to  do  with  a  trader ;  as,  for  instance,  to  purchase  an 
estate;  for  an  act  of  bankruptcy  may  have  been  committed 
five  years  before,  which  will  reach  the  estate.  But  look  to 
the  danger  on  the  other  side :  one  partner  giving  a  bond ; 
and  the  creditors  of  the  partnership  looking  to  the  stock 
itself.  It  is  said,  that  in  this  case  the  joint  creditors  had 
done  nothing;  and  this  meritorious  creditor  has  a  right  to 
be  preferred  on  account  of  his  early  diligence.  But  what 
is  that,  to  which  he  is  entitled?  The  estate  of  a  partner  is 
debtor  to  him.  The  question  therefore  recurs  to  the  con- 
sideration, what  it  was  that  partner  had ;  for  the  creditor 
cannot  be  entitled  to  any  more.  It  therefore  argues  nothing 
to  say,  he  has  the  merit  of  diligence,  till  we  see,  upon  what 
that  merit  can  attach.  If  the  partner  himself  therefore  had 
nothing  more  than  an  interest  in  the  surplus  beyond  the 
debts  of  the  partnership  upon  a  division,  if  it  turns  out, 
that  at  Common  Law  that  is  the  whole,  that  can  be  deliv- 
ered to,  or  taken  by,  the  assignee  of  a  partner,  the  execu- 
tor, the  sheriff,  or  the  assignee  under  a  commission  of  bank- 
ruptcy, all,  that  is  delivered  to  the  creditor,  taking  out  the 
execution,  is  the  interest  of  the  partner  in  the  condition  and 
state  he  had  it ;  and  nothing  was  due  to  this  partner  sepa- 
rately, the  partnership  being  insolvent.  The  whole  prop- 
erty was  due  to  the  partnership  creditors,  and  not  to  either 
partner. 


552        ALIENATION  OF  INTERESTS  IN  PROPERTY 


LORD  V.  BALDWIN. 

In  the   Supreme  Judicial  Court   of   Massachusetts, 

1828. 

23  Massachusetts  Reports,  348. 

This  was  an  action  of  the  case  against  the  defendant, 
a  deputy  sheriff  for  neglecting  to  levy  an  execution  in  favor 
of  the  plaintiff  against  John  Brown,  upon  certain  goods 
which  had  been  attached  by  the  defendant,  upon  the  origi- 
nal writ,  as  the  property  of  Brown.  Brown  carried  on  busi- 
ness in  his  own  name  alone,  and  the  goods  were  in  his  shop 
as  stock  in  trade.  Before  the  plaintiff  attached,  there  had 
been  three  attachments  of  the  same  goods  in  favour  of  W. 
Lawrence,  the  Dorchester  Iron  Company  and  Aaron  Brown, 
in  suits  against  John  Brown  alone ;  in  which  suits  judg- 
ments were  obtained  and  executions  were  duly  issued  and 
delivered  to  the  defendant.  Soon  after  these  attachments, 
by  the  consent  of  all  parties,  the  goods  were  sold  by  the  de- 
fendant pursuant  to  law.  The  defendant  paid  to  Lawrence 
and  the  Dorchester  Iron  Company  the  amount  of  their  re- 
spective executions,  and  to  Aaron  Brown  a  certain  sum  in 
part  satisfaction  of  his  execution;  retaining  in  his  hands 
enough  of  the  proceeds  to  satisfy  that  execution  in  full,  and 
the  plaintiff's  execution  in  part. 

After  the  foregoing  attachments,  Bogart  &  Co.  sued 
out  their  writ  of  attachment  against  John  Brown  and  Aaron 
Brown,  charging  them  as  copartners,  and  on  this  writ  the 
defendant  attached  the  same  goods  as  copartnership  prop- 
erty. On  the  trial  of  the  action,  upon  the  question  of  co- 
partnership, Bogart  &  Co.  obtained  a  verdict,  and  judgment 
was  rendered  in  their  favour  against  John  and  Aaron 
Brown ;  and  the  defendant  was  notified  to  hold  the  proceeds 
of  the  stock  to  satisfy  the  judgment. 

The  debt  upon  which  the  judgment  in  favour  of  Bogart 


TAYLOR  V.  FIELDS  553 

&  Co.  was  rendered,  arose  from  the  sale  of  goods  to  John 
Brown,  and  the  goods  made  part  of  the  stock  in  the  store; 
and  the  other  debts,  except  the  one  due  to  Aaron  Brown, 
arose  in  the  same  way ;  it  being  unknown  that  a  copartner- 
ship existed  between  John  and  Aaron  Brown. 

If  the  court  should  be  of  the  opinion  that  the  existence 
of  a  dormant  partnership,  unknown  to  all  the  parties  who 
dealt  with  John  Brown,  did  not  give  Bogart  &  Co.  priority 
of  security  upon  the  goods  as  partnership  property,  the  de- 
fendant was  to  be  defaulted.^ 

Parker  C.  J.  delivered  the  opinion  of  the  Court.  The 
question  presented  in  this  case  is  entirely  new ;  no  authori- 
ties have  been  cited,  nor  have  we  been  able  to  find  any 
whicli  bear  very  strongly  upon  it. 

The  plaintiff  made  the  third  attachment  upon  the 
goods  apparently  belonging  to  John  Brown,  to  secure  his 
debt. 

The  defendant  had  sufficient  funds  in  his  hands,  the 
proceeds  of  the  goods  attached,  to  satisfy  the  judgment  in 
this  suit,  in  whole  or  in  part,  if  he  is  not  obliged  in  law  to 
appropriate  them  to  the  satisfaction  of  another  judgment 
obtained  by  Bogart  &  Co.  against  John  and  Aaron  Brown, 
who  made  their  attachment  on  the  same  goods,  after  the 
attachment  made  by  the  plaintiff ;  and  the  right  of  priority 
is  supposed  to  be  in  Bogart  &  Co..  because  John  and  Aaron 
Brown  are  found  to  be  partners,  having  a  joint  interest  in 
the  stock  of  goods  which  were  attached,  upon  the  principle 
that  the  partnership  fund  is  to  be  applied  to  the  payment 
of  partnership  debts,  before  a  separate  creditor  of  one  of 
the  firm  can  be  allowed  to  resort  to  it  for  satisfaction  of  his 
debt.  The  principle  is  well  settled,  having  been  first  ap- 
plied to  cases  of  distribution  under  commission  of  bank- 
ruptcy. But  it  is  a  reasonable  principle,  and  has  been 
adopted  and  enforced  by  this  Court  in  the  case  of  Pierce  v. 
Jackson,  6  Mass.  Rep.  242,  and  is  there  said  to  be  a  prin- 
ciple of  the  common  law. 

'  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


554        ALIENATION  OF  INTERESTS  IN  PROPERTY 

It  is  only  the  application  of  this  principle  to  cases  as 
they  arise,  which  can  afford  any  room  for  argument  or 
doubt ;  and  in  order  to  determine  such  question,  the  reason 
of  the  rule  must  be  sought  for,  and  the  particular  case  must 
be  brought  within  the  reason,  as  well  as  within  the  terms 
of  the  law. 

The  basis  upon  which  the  rule  rests  is,  that  those 
funds  shall  be  liable  upon  which  the  credit  was  given.  Those 
who  sell  goods  or  make  contracts  with  a  company  or  firm, 
are  supposed  to  trust  to  the  ability  or  property  of  the 
firm.  Those  who  trust  the  individual  member,  rely  upon 
his  sufficiency  alone.  The  former  are  equitably  entitled  to 
be  first  paid  out  of  the  joint  stock,  and  if  after  paying  all 
the  debts  there  is  still  a  surplus,  that  is  the  property  of  the 
individuals  in  proportion  to  their  interest  in  the  common 
fund,  and  to  that  extent  only  is  it  liable  to  the  creditor  of 
the  individual.  In  the  case  of  common  public  partnerships 
there  is  no  difficulty  in  applying  the  principle,  and  in  case 
of  bankruptcy  or  insolvency  it  is  the  fair  mode  of  distri- 
bution of  the  effects. 

But  the  case  before  us  is  that  of  a  dormant  partner- 
ship, which  is  necessarily,  from  its  very  character,  unknown 
at  the  time  the  liability  is  incurred.  All  the  creditors  sold 
their  goods  or  made  their  contract  with  the  ostensible,  visi- 
ble partner :  they  trusted  to  him  personally,  and  to  the 
goods  upon  which  he  was  trading  as  his.  The  dormant 
partner  is  brought  to  light  by  ex  post  facto  investigation, 
and  he  is  made  responsible,  not  because  he  was  trusted, 
but  because  he  secretly  enjoyed  the  profits  of  the  business. 
Now  in  such  case,  the  reason  for  giving  preference  to  such 
creditors  as  may  first  discover  his  liability,  so  that  stock 
ostensibly  belonging  to  the  visible  partner  shall  first  be 
applied  to  the  satisfaction  of  their  debts,  does  not  exist. 
Even  if  he  owned  the  whole  of  the  stock,  as  between  him 
and  the  known  man  of  business  still  it  is  in  law  the  prop- 
erty of  the  latter,  for  he  is  allowed  to  claim  and  use  it  a.s 


TAYLOR  V.  FIELDS  555 

his  alone,  and  thus  lead  persons  to  trust  him  upon  the  faith 
of  the  goods  in  his  possession. 

Whether  a  private  creditor  of  his  could  seize  property 
so  situated  and  hold  it  against  the  creditors  of  the  ostensi- 
ble owner,  is  a  question  of  a  different  nature. 

The  question  now  is  whether,  when  all  the  creditors 
have  trusted  the  man  of  business  and  apparent  owner  of 
the  goods,  any  one  of  them  who  is  behind  the  rest  in  his 
attachment,  shall  supplant  them  and  gain  priority  because 
he  has  discovered  this  concealed  liability.  At  the  time  the 
debt  was  created,  he  stood  upon  the  same  footing  with  the 
rest ;  he  trusted  John  Brown  and  the  goods  in  his  pos- 
session ;  so  did  they.  They  have  taken  possession  first  of 
the  fund  which  was  held  out  to  the  public  as  the  means  of 
credit,  and  it  might  be,  and  probably  was  in  this  very  case, 
that  the  goods  attached  are  the  identical  goods  which  they 
sold  to  the  party  sued.  There  would  be  then  no  pretence 
of  equity  and  we  think  not  of  law,  in  allowing  a  preference 
founded  upon  no  meritorious  distinction  of  circumstances. 

That  this  question  has  not  arisen  before,  is  owing  per- 
haps principally  to  the  fact,  that  most  of  the  dormant  part- 
nerships have  been  such  as  have  resulted  from  a  loan  of 
money  to  be  employed  in  the  partnership  concerns,  where 
the  receipt  of  a  part  of  the  profits  of  the  business  has  been 
the  compensation  for  the  loan.  The  silence  of  the  books 
themselves  seems  evidence  of  the  unsoundness  of  the  doc- 
trine now  sought  to  be  applied.  It  is  considered  that  the 
mere  fact  of  liability  as  a  partner  does  not  give  an  in- 
terest or  ownership  in  the  stock  in  trade;  the  whole  may 
ha\e  been  purchased  for  and  in  the  name  of  the  visible 
partner,  and  it  usually  is  so  in  cases  of  dormant  partner- 
ships. The  property  then  is  not  the  dormant  partner's  to 
the  prejudice  of  those  who  trust  him  who  carries  on  the 
business  and  obtains  the  credit.    Ex  parte  Eiidcrbv,  2  Barn. 

6  Cres.  389;  Smith  v.  Watson,  ibid.  401  ;  George  v.  Clagett, 

7  T.  R.  359.  361,  note. 

So  far  as  the  cases  of  dormant  partnership  have  been 


556        ALIENATION  OF  INTERESTS  IN  PROPERTY 

discussed,  the  opinions  advanced  have  been  of  a  contrary 
tendency.  Thus  an  action  may  be  maintained  by  the  ostensi- 
ble partners,  without  joining  a  dormant  partner,  against  a 
person  who  dealt  only  with  the  ostensible  partners.  Mon- 
tagu, 182;  Lcvcck  V.  Shaftoc,  i  Esp.  Rep.  468.  This 
shows  that  whether  the  action  is  to  be  affected  or  not,  de- 
pends upon  the  parties  with  whom  the  contract  is  made. 

So  in  an  action  brought  by  ostensible  and  dormant 
partners,  the  defendant  may  set  off  a  debt  due  from  the 
ostensible  partner  only.  Montagu,  182  ;  7  T.  R.  359;  Lloyd 
V.  Archboivlc,  2  Taunt.  324. 

In  the  case  of  Curtis  v.  Perry,  6  Ves.  747,  the  follow- 
ing case  is  stated  by  the  Lord  Chancellor  as  having  oc- 
curred, though  there  seems  to  be  no  report  of  it.  Three 
persons,  partners  in  a  manufactory  in  Lancashire,  sold  their 
goods  in  London  in  the  names  of  two  of  them  only.  A 
credit  therefore  was  acquired  by  them  all  in  Lancashire, 
and  by  two  in  London,  which  affected  the  distribution  of 
their  property.  And  in  2  Barnw.  &  Cres.  401,  it  is  said,  if 
a  secret  partnership  could  be  set  up  as  an  answer  to  as- 
signees claiming  property  which  had  been  left  in  the  order 
and  disposition  of  the  bankrupt,  as  apparent  owner,  enor- 
mous debts,  unconnected  with  the  partnership  business, 
might  be  contracted  upon  the  credit  gained  by  the  possession 
of  property,  which  a  person  wholly  unknown  to  the  creditors 
might  claim,  to  the  exclusion  of  their  just  demands. 

Finding  therefore  that  this  is  a  first  attempt  to  main- 
tain the  preference  which  is  sought  for  in  this  action,  that 
the  meritorious  ground  of  preference  in  other  cases  does 
not  here  exist,  and  that  the  analogical  reasoning  upon  case^ 
which  have  been  decided  is  against  the  defendant,  we  are 
of  opinion  that  the  plaintiff  is  entitled  to  recover  of  the 
deputy  sheriff  so  much  as  remains  in  his  hands  of  the  pro- 
ceeds of  the  property  attached,  after  satisfying  the  exe- 
cution of  Aaron  Brown.- 


Cammack  v.  Johnson,  2  N.  J.  Eq.  163.  1839.     (C  ct  al.  secured  judg- 
ments against   B,  levied  on  property  in   B's  possession  and  the  Sheriff 


TAYLOR  V.  FIELDS  557 

was  about  to  sell  the  same,  when  A  brought  a  bill  in  equity  setting  fortli 
that  he,  A,  was  a  dormant  partner  of  B ;  that  the  partnership  was 
indebted  to  A  ;  that  he.  A,  believed  that  the  debts  due  by  B  to  C  et  al. 
were  in  whole  or  part  the  individual  debts  of  B.  The  prayer  of  the  bill 
was  for  an  injunction  to  restrain  the  sale  of  partnership  property,  on 
account  of  the  partnership,  and  the  appointment  of  a  receiver.  The 
arswer  of  C  ct  al.  denied  all  knowled;-;e  of  the  partnership.  On  appeal, 
injunction  dissolved.  See  contra:  Witter  v.  Richards,  infra,  Doner  v. 
^tanffer,  note  2. 


558        ALIENATION  OF  INTERESTS  IN   PROPERTY 


DONER  V.  STAUFFER. 
In  the  Supreme  Court  of  Pennsylvania^  1829. 

I  Penrose  mid  Watts'  Reports,  198. 

Writ  of  error  to  the  Court  of  Common  Pleas  of  Lan- 
caster county. 

This  was  a  feigned  issue,  directed  by  that  court,  and 
joined  between  the  defendants  in  error,  who  w'ere  the 
plaintiffs  below,  and  for  whom  the  verdict  passed,  and  the 
plaintiffs  in  error,  who  were  the  defendants  below. 

It  appeared  from  the  evidence  in  the  cause  that  Daniel 
Howry  and  Benjamin  B.  Eshelman  entered  into  partner- 
ship in  a  manufacturing  establishment,  under  the  firm  of 
Howry  and  Eshelman.  They  became  considerably  indebted. 
Judg'ments  were  entered  and  executions  were  issued  against 
each  of  them.  Abraham  Doner,  Samuel  Herr,  John  Howry 
and  Samuel  Howry  had  severally  judgments  against  Daniel 
Howry,  on  each  of  which  an  execution  issued  against  him, 
and  was  levied  on  the  9th  of  August,  1825,  on  the  per- 
sonal property  of  Daniel  Howry  and  Benjamin  B.  Eshel- 
man as  partners  in  trade. 

John  Staufifer,  Christian  Breckbill  and  Jacob  Eshelman 
had  severally  obtained  judgments  against  B.  B.  Eshelman, 
on  each  of  which  judgments  an  execution  was  issued  against 
him  and  levied  on  the  iith  day  of  August  1825,  on  Benja- 
min B.  Eshelman's  share  of  the  personal  property  of  Ben- 
jamin B.  Eshelman  and  Daniel  Howry,  as  partners  in  trade. 
By  virtue  of  these  and  other  executions,  the  personal  prop- 
erty of  the  firm  was  sold  for  the  sum  of  $5070.39,  which, 
after  payment  of  the  costs,  left  a  balance  of  $4779.  This 
balance  was  paid  into  court  for  distribution. 

On  a  rule  obtained  by  the  counsel  of  Stauffer,  Breckbill 
and  Eshelman,  to  show  cause  why  the  one-half  of  the  pro- 
ceeds of  the  sale  of  the  firm  property  should  not  be  applied 


DONER  V.  STAUFFER  559 

to  the  satisfaction  of  their  executions  against  B.  B.  Eshel- 
man,  the  court  decided  that  the  execution-creditors  of  Ben- 
jamin B.  Eshehnan  had  a  legal  right  to  his  share  of,  and 
interest  in  the  partnership  effects  of  the  firm  of  Howry  & 
Eshelman,  as  it  stood  on  the  nth  August  1825,  when  the 
executions  were  levied ;  and  directed  this  issue,  to  try  what 
that  share  or  interest  was. 

The  plaintiffs  claimed  a  moiety  or  half  part  of  the 
$4779  as  their  share. 

The  plaintiffs  having  closed  their  evidence,  the  defend- 
ants, in  support  of  the  issue  taken  in  the  cause,  offered  to 
prove  that  the  firm  of  Howry  &  Eshelman  was  entirely 
insolvent  on  the  i  ith  August  1825  ;  that  the  debts  and  claims 
against  the  said  firm  existing  on  the  said  nth  August 
1825,  which  were  then  unpaid,  greatly  exceeded  the  whole 
property  of  the  said  firm ;  that  Benjamin  B.  Eshelman,  on 
the  said  day,  had  no  interest  whatever  in  the  said  firm,  and 
that  Daniel  Howry,  the  other  partner,  is  greatly  interested 
in  the  application  of  the  funds  of  the  said  firm  to  the  pay- 
ment of  the  debts  of  the  said  firm,  as  he  is  answerable,  in- 
dividually and  as  a  partner,  for  the  whole  of  the  said  debts. 
Which  offer  being  objected  to,  the  court  overruled  the 
same,  and  delivered  the  following  opinion,  to  wit :  "I  am 
satisfied  that  the  authorities  cited  settle  the  law  as  it  applies 
to  the  cases  decided,  that  is  to  say,  to  cases  where  there  are 
separate  executions  against  one  partner  levied  on  the  part- 
nership effects.  But  this  is  a  case  where  the  whole  part- 
nership effects  are  swept  away  by  separate  executions 
against  each  partner,  where  the  creditors  at  large  have  no 
lien.  I  must  say  that  the  principal  object  in  directing  this 
issue  was,  as  it  was  a  case  of  great  importance,  to  give  an 
opportunity  of  completely  considering  and  reviewing  the 
law  on  the  subject.  But  I  am  very  clear  that  Benjamin  B. 
Eshelman's  interest,  or  want  of  interest,  cannot  be  shown 
by  evidence  of  debts  due  from  the  firm,  and  that  the  testi- 
mony offered  relative  to  the  insolvency  of  the  firm,  and 
the  interest  of  Daniel  Howry  in  the  application  of  the 


560        ALIENATION  OF  INTERESTS  IN  PROPERTY 

funds  of  the  firm  to  the  payment  of  its  debts,  cannot  be 
admitted." 

To  this  opinion,  overrnhng  the  evidence  offered,  the 
defendants  excepted. 

Although  the  issue  joined  was  between  the  separate 
execution-creditors  of  the  respective  partners,  the  counsel 
for  the  defence  appeared  for  the  joint-creditors  of  the  firm, 
to  controvert  the  right  of  the  separate  creditors  of  Eshel- 
man,  to  be  paid  out  of  the  fund  in  court,  before  the  joint- 
creditors  were  satisfied ;  and  they  alleged  that  after  the 
executions  of  the  separate  creditors  were  levied,  Howry  & 
Eshelman  had  made  an  assignment  to  trustees,  for  the  bene- 
fit of  the  creditors  of  the  firm. 

The  only  question  now  raised  in  this  court,  upon  the 
charge  of  the  court  below,  and  the  bill  of  exception,  was, 
whether  the  separate  execution-creditors  of  Eshelman  had 
a  right  to  be  paid  out  of  the  proceeds  of  the  sales  of  the 
goods  of  the  firm,  before  the  joint-creditors  were  satisfied 
out  of  that  fund.^ 

Gibson,  C.  J. :  It  is  settled  by  a  train  of  decisions  in 
the  American,  as  well  as  the  British  courts,  that  the  joint 
efTects  belong  to  the  firm,  and  not  to  the  partners,  each  of 
whom  is  entitled  only  to  a  share  of  what  may  remain  after 
payment  of  the  partnership  debts;  and  consequently,  that  no 
greater  interest  can  be  derived  from  a  voluntary  assign- 
ment of  his  share,  or  a  sale  of  it  on  execution.  That  a  con- 
tract which  enables  the  parties  to  keep  a  class  of  their 
creditors  at  bay,  and  yet  retain  the  indicia  of  ownership, 
should  not  have  been  deemed  within  the  Statutes  of  Eliza- 
beth, is  attributable  exclusively  to  the  disposition  universally 
manifested  by  courts  of  justice  to  encourage  trade.  But 
such  as  it  is,  has  the  contract  of  partnership  been  estab- 
lished ;  and  the  principle  which  enables  the  partners  to 
pledge  to  each  other,  the  joint  effects  as  a  fund  for  payment 
of  the  joint  debts,  has  introduced  a  preference  in  favor  of 
the  joint  creditors,  founded  on  no  merits  of  their  own,  but 

^  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


DONER  z'.  STAUFFER  561. 

on  the  equity  which  springs  from  the  nature  of  the  con- 
tract between  the  partners  themselves.  The  author  of  the 
Commentaries  on  American  Law,  vol.  3,  p.  38,  attribj.ites 
this  preference  to  an  inherent  equity  in  the  joint  creditors 
themselves,  arising  from  a  supposed  acquisition  of  the  part- 
nership effects  from  their  means.  The  opinions  of  Chan- 
cellor Kent  are  so  justly  entitled  to  deference  that  no  pru- 
dent judge  will  differ  from  him  without  hesitation;  yet  I 
cannot  but  adhere  to  the  opinion  I  expressed  in  Bell  v.  Ncw- 
iiiaii,  5  S.  &  R.  92,  that  in  cases  of  insolvency  or  bank- 
ruptcy, in  which  alone  the  question  of  priority  can  be 
material,  the  joint  effects  consist  of  the  wreck  of  the  capital 
originally  embarked.  Under  a  joint  commission,  by  which 
the  effects  pass  to  the  assignees,  while  the  partners  are  per- 
sonally ^Jischarged,  I  admit,  that  the  preference  of  the  joint 
creditors  has  no  other  foundation,  if  it  has  any  at  all,  than 
this  supposed  inherent  equity ;  and  the  best  elementar}^ 
writer  on  the  subject  so  disposes  of  the  difficulty :  Gow  on 
Partnership  341-2.  But  in  the  case  of  a  separate  commis- 
sion. Lord  Eldon  expressly  jxits  it  on  the  particular  equity 
of  the  partners  themselves.  Ex  parte  Ruffin,  6  Vesey  126, 
and  in  the  case  of  an  execution.  Chief  Baron  McDonald 
does  the  same :  Taylor  v.  Fields,  4  Vesey  396.  To  secure 
the  firm  from  the  extra^•agance  of  its  members,  by  pre- 
venting the  capital  from  being  withdrawn  from  the  pur- 
poses of  the  partnership,  the  stock  is  pledged  for  the  burden 
which,  from  the  nature  of  the  connection,  is  to  be  borne  by 
all ;  but  in  moulding  the  law  of  partnership  to  its  present 
form,  the  credit  gained  by  giving  the  joint  creditors  a 
preference,  was,  if  an  object  at  all.  a  very  remote  one. 
Accordingly,  with  the  single  exception  of  a  joint  commis- 
sion, we  find  that  wherever  the  partners  are  not  individuallv 
involved,  the  joint  creditors  have  no  preference  whatever; 
as  in  the  instance  of  a  bona  fide  assignment  of  the  effects, 
to  one  of  the  partners,  after  the  partnership  has  been  dis- 
solved. 

In  consequence  of  the  rule  as  I  have  stated  it,  a  sep- 


562        ALIENATION  OF  INTERESTS  IN  PROPERTY 

arate  execution-creditor  sells,  not  the  chattels  of  the  part- 
nership, but  the  interest  of  the  partner, ""encumbered  with 
the  joint  debts ;  and  the  joint  creditors  therefore  have  no 
claim  to  the  proceeds.  To  allow  them  the  proceeds,  and 
recourse  to  the  property  in  the  hands  of  the  purchaser, 
would  subject  it  to  a  double  satisfaction.  Neither  can  they 
take  the  proceeds  or  the  property  at  their  election.  They 
can  interfere  at  all,  only  on  the  ground  of  a  preference 
which  has  regard  only  to  the  partnership  effects,  and  these 
have  not  been  sold,  but  only  the  subordinate  interest  of  the 
partner,  which  was,  strictly  speaking,  his  separate  estate. 
Their  recourse,  therefore,  is  necessarily  to  the  property  in 
the  hands  of  the  purchaser.  Now,  had  the  sheriff  sold  the 
interest  of  but  one  of  the  partners,  the  execution-creditor 
would  have  clearly  been  entitled  to  the  proceeds.  But  al- 
though he  sold  the  whole  stock  at  one  operation,  on  sep- 
arate executions  against  both,  there  was,  in  contemplation 
of  law,  a  separate  sale  of  the  interest  of  each.  What  then 
would  have  been  the  effect,  had  these  sales  been  made  con- 
secutively? The  first,  in  the  order  of  time,  would  have 
l)assed  the  interest  of  the  partner,  subject  to  the  equity  of 
his  co-partner,  and  the  execution-creditor  would  have  been 
entitled  to  the  price.  But  this  equity,  together  with  the 
remaining  interest  of  the  other  partner,  would  have  passed 
by  the  succeeding  sale  to  the  same  purchase!  ;  the  execution- 
creditor,  in  that  instance,  also  taking  the  proceeds.  Can  it 
make  a  difference,  then,  that  instead  of  being  consecutive, 
these  two  sales  were  simultaneous?  A  curious  question 
might  arise,  whether  separate  purchasers  of  the  shares  re- 
spectively, would  .stand  in  the  relation  of  partners,  so  as  to 
enable  the  joint-creditors  to  follow  the  goods.  It  seems  to 
me  they  would  not,  because  not  personally  involved  in  pay- 
ment of  the  debts. 

Here,  however,  where  the  shares  of  the  partners  are 
united  in  the  same  purchaser,  every  semblance  of  partner- 
ship-equities is  at  an  end.  As  regards  the  goods  in  the 
hands  of  the  purchasers,  this  is  conceded ;  but  the  joint- 


DOXER  r.  STAUFFER  563 

creditors  insist  that  the  proceeds  are  to  be  substituted  for 
the  goods,  and  subjected  to  the  same  equities.  That  might 
be  done  if  the  proceeds  belonged  to  the  partners;  but  it-  is 
not  easy  to  imagine  how  they  are  to  be  treated  as  the 
owners  of  mone}^  raised  by  a  sale  on  executions  against 
them.  For  what  purpose  should  the  ownership  of  it  be 
vested  in  them,  even  for  an  instant?  Not  to  give  the  joint- 
creditors  a  preference,  for  that  would  make  the  rights  of 
the  partners  depend  on  the  claims  of  the  joint-creditors, 
who,  on  the  contrary,  can  claim  nothing  but  by  virtue  of 
the  lien,  where  there  is  one,  of  the  partners. 

To  say  that  the  partners  have  such  a  lien  because  the 
joint-creditors  have  an  ecjuity,  and  that  the  joint-creditors 
have  an  equity  because  the  partners  have  a  lien,  would  be  to 
argue  in  a  circle.  Here  the  partners  cannot  be  prejudiced 
in  respect  of  their  claims  on  each  other,  the  advantage  to 
be  gained  from  an  application  of  the  joint  effects  to  their 
.separate  debts,  being  mutual  and  equal.  The  consecjuences 
are  precisely  the  same,  as  if  the  effects  had  been  sold  on 
execution  against  both.  We  are,  therefore,  of  opinion  that 
the  joint-creditors  can  not  interpose ;  and  consequently,  that 
the  rejection  of  the  evidence,  as  well  as  the  direction  to  the 
jury,  was  substantially  right. 

I  liave  considered  the  question  on  principles  applicable 
to  it,  in  analogy  to  well  settled  parts  of  the  law  of  part- 
nership, rather  than  on  authority  bearing  directly  on  the 
point.  But,  since  this  opinion  was  drawn,  my  brother 
Huston  has  directed  my  attention  to  the  case  of  Briiikcr- 
hoff  V.  Marvin,  5  Johns.  Ch.  300,  which  is  direct  to  the 
point;  so  that  independent  of  analogies,  we  have  an  author- 
ity on  which  we  might  safely  rule  the  cause.  But  both 
principle  and  authority  are  adverse  to  the  preference 
claimed;  and  the  issue,  therefore,  was  correctly  found  for 
the  plaintiff. 

Judgment  affirmed.- 


'  Compare:    McXutt  v.  Stmylwni,  39  Pa.  269,  1861.     (A  and  B  were 
partners.     A  assigned  all   his  interest  in  the   firm  assets  to   C   for  the 


564        ALIENATION  OF  INTERESTS  IN  PROPERTY 

1)eiicfit  of  liis  creditors.  B  also  assigned  all  his  interest  in  the  firm 
assets  to  C  for  a  similar  purpose.  D,  a  firm  creditor,  issued  execution 
and  the  Sheriff  levied  on  the  property  which  had  helonged  to  the  firm. 
C  brought  suit  against  the  Sheriff.  Judgment  for  the  plaintiff  on  the 
ground  tliat  the  successive  assignments  vested  the  entire  property  of  the 
firm  in  C.     See  Case  v.  Beauregard,  infra,  p.  603.) 

Coint^arc:  Witter  v.  Richards,  10  Conn.  T,y,  1833.  (A  and  B  were 
partners,  B  being  a  dormant  partner.  C,  a  separate  creditor  of  A, 
attached  firm  property.  D,  a  firm  creditor,  though  ignorant  of  the 
existence  of  the  firm,  subsequently-  attached  firm  assets,  and  then 
brought  a  bill  in  equity  to  enjoin  sale  under  first  attachment  and  to 
establish  his  right  to  priority.  The  prayer  of  the  bill  was  granted. 
Williams,  J.:  "But  it  is  claimed,  that  as  this  partnership  was  a  dormant 
one,  and  as  the  creditors  did  not  know  of  its  existence,  they  ought  to 
stand  upon  the  same  ground  as  the  separate  creditors  of  Hutchinson, 
whom  they  all  trusted.  Now,  if  the  partnership  creditors  had  done  any 
act  to  hold  out  Hutchinson  as  the  sole  owner  of  the  goods,  or  if  there 
was  any  fraud  in  the  case,  or  even  if  they  could  be  made  responsible  for 
the  declarations  of  Kinne,  there  certainly  would  be  some  foundation 
for  this  argument.  But  no  fraud  is  found;  and  they  cannot  be  respon- 
sible for  Kinne's  declarations ;  nor  have  they  done  any  act  intending  to 
give  this  man  a  false  credit.  The  partners,  therefore,  must  stand  upon 
their  rights,  as  recognized  in  a  court  of  equity.  And  the  right  of  the 
separate  creditor  depends  upon  the  interest  which  each  partner  had  in 
the  partnership  property;  and  such  creditor  can  have  nothing  but  what 
his  debtor  had  therein." 

Linford  v.  Lin  ford,  28  N.  J.  L.  113,  1859.  (A  and  B  were  partners. 
A  advanced  money  to  the  firm  and  took  I3's  individual  bond.  C  ad- 
vanced money  to  the  firm  and  took  the  bond  of  A  and  B.  A  and  C 
agreed  that  if  judgments  were  entered  on  their  bonds  the  amounts  raised 
thereby  should  be  paid  to  A  and  B  ratably.  Judgments  were  entered  on 
both  bonds,  and  the  partnership  property  sold  on  executions  issued. 
Held,  that  A  and  C  should  be  paid  ratably  out  of  the  proceeds  of  the 
sale ;  that  the  law  would  have  given  C  priority,  but  he  had  chosen  to 
barter  away  his  rights,  and  it  was  not  necessary  to  decide  the  question 
of  how  far  the  court  would  interfere  on  the  application  of  B  to  have 
the  partnership  property  applied  first  to  the  payment  of  partnership 
debts. 

Fandike's  Appeal,  57  Pa.  9,  1868.  (A  and  B  were  partners.  Under 
executions  issued  by  the  separate  creditors  of  each,  the  Sheriff  levied 
and  sold  property  belonging  to  the  partnership.  Held,  that  the  Sheriff 
only  sold  the  interest  of  A  and  B  in  the  property,  not  the  title  of  the 
partnership  to  the  property,  and  that  therefore  a  firm  creditor  as  such 
had  no  interest  in  the  proceeds  of  the  sale.) 


TAPPAX  V.  BLAFSDELL  565 


TAPPAN  r.  BLAISDELL. 

In  the   Superior   Court  of  Judicature,   New   Hamp- 
shire, 1830. 

5  New  Hampshire  Reports.  190. 

Case  against  the  defendant,  a  deputy  sheriff,  for  not 
levying  an  execution  in  favor  of  the  plaintiffs  against  Hub- 
bard Harris  and  Jacob  Blaisdell,  upon  certain  goods  which 
had  been  attached  upon  mesne  process,  as  the  partnership 
property  of  said  Harris  and  Blaisdell. 

The  cause  was  tried  here  upon  the  general  issue,  at 
May  term,  1829,  when  it  appeared  in  evidence  that  on  the 
30th  of  October,  1826,  by  virtue  of  a  writ  in  favor  of  the 
Grafton  bank  against  Jacob  Blaisdell,  his  interest  in  the 
goods  belonging  to  the  firm  of  Harris  and  Blaisdell  was 
attached ;  and  on  the  same  day,  by  virtue  of  a  writ  in  favor 
of  the  Pemigewasset  bank,  against  Harris,  his  interest  in 
the  goods  belonging  to  the  same  firm  was  attached. 

On  the  /th  November,  1826,  the  goods  attached  as 
aforesaid  were  again  attached  by  virtue  of  a  writ  in  favor 
of  the  plaintiff,  against  said  firm  of  Harris  and  Blaisdell, 
for  a  partnership  debt. 

The  plaintiffs  in  said  suits  obtained  judgments  and 
executions,  and  all  the  executions  were  delivered  to  the  de- 
fendant within  thirty  days  after  judgment. 

On  the  1 6th  Novcmljer,  1826,  notice  was  given  to  the 
defendant  as  follows: 

"To  A.  A.  Brewster,  Esq.,  sheriff,  and  Joshua  Blais- 
dell, deputy : 

Gentlemen  :  You  are  hereby  notified  not  to  sell  the 
property  of  Hubbard  Harris  and  Jacob  Blaisdell,  belonging 
to  them  jointly  as  copartners  in  trade,  and  attached  bv  you 
in  the  action,  the  Grafton  bank  against  said  Blaisdell,  and 
the  Pemigewasset  bank  against  said  Harris,  as  those  suits 


566        ALIENATION  OF  INTERESTS  IN  PROPERTY 

are  founded  upon  the  individual  debts  of  said  Harris  and 
Blaisdell,  and  not  on  their  joint  debts,  as  partners  in  trade; 
but  reserve  said  property  to  be  sold  and  appropriated  in  the 
suits,  Tappan  and  Mansfield  against  said  Harris  and  Blais- 
dell, &c.,  as  those  suits  are  founded  on  debts  due  from 
Harris  and  Blaisdell,  jointly,  as  partners  in  trade. 

J.  QuiNCY,  Attorney,  &c. 

But  the  defendant,  after  receiving  notice  as  aforesaid, 
sold  the  property  and  applied  the  whole  proceeds  to  the 
satisfaction  of  the  said  executions  in  favor  of  said  banks, 
and  returned  the  execution  of  the  plaintiffs  in  no  part  satis- 
fied. 

A  verdict  was  taken  for  the  plaintiffs,  subject  to  the 
opinion  of  the  court  upon  the  forgoing  case.^ 

Richardson,  C.  J. :  It  seems  to  have  been  understood 
as  settled  law  for  a  long  time,  that  the  share  which  a  part- 
ner has  in  the  partnership  property  may  be  taken  and  sold 
by  virtue  of  an  execution  issued  for  his  separate  debt. 

According  to  the  old  cases  in  the  courts  of  law,  the 
separate  creditor  took  the  goods  of  the  partners,  and  sold 
the  share  of  his  debtor,  without  inquiring  what  were  the 
rights  of  the  other  partners,  or  what  was  the  real  share  of 
each.  I  Shower  169,  Blackhurst  v.  Clinkard;  i  Salkeld 
392 ;  Comyn's  Rep.  277. 

But  the  true  nature  of  a  partnership  seems  to  have 
been  better  understood  in  more  modern  times,  and  it  is 
now  settled  that  each  partner  has  a  lien  on  the  partnership 
property,  in  respect  to  the  balance  due  to  him  and  the 
liabilities  he  may  have  incurred  on  account  of  the  partner- 
ship. 4  Johns.  C.  Rep.  525  ;  Cowper  445,  Fox  v.  Hanbury; 
4  Vesey  396,  Taylor  v.  Fields;  17  Vesey  193,  Dutton  v. 
Morrison;  16  Johns.  102,  Smith's  Case. 

It  is  also  well  settled  that  partnership  property  cannot 
be  holden  to  pay  the  separate  debt  of  an  individual  partner 
until   all   the  partnership  debts  are  paid.      From  the  very 


*  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


TAPPAN  V.  BLAISDELL  567 

nature  of  a  partnership  it  is  clear  that  the  whole  property 
is  pledged  to  the  payment  of  the  partnership  debts,  in 
preference  to  any  other  purpose.  4  Vesey,  396,  Taylor-v. 
Fields;  17  Mass.  Rep.  206,  207;  6  Pick.  350. 

The  necessary  consequence  of  all  this  is,  that  goods 
belonging  to  a  firm  cannot  be  holden  by  attachment  upon  a 
writ,  or  by  a  seizure  upon  execution,  against  an  individual 
partner  for  his  separate  debt,  so  long  as  any  debt  remains 
due  from  the  company.  All  that  can  be  taken  is  the  in- 
terest of  the  debtor  in  the  firm ;  not  the  partnership  effects 
themselves,  but  the  right  of  the  partner  to  a  share  of  the 
surplus  that  may  remain  after  all  the  debts  are  paid.  16 
Johns.  106;  3  B.  &  P.  288,  Parker  v.  Pistor;  ibid  289,  Chap- 
man V.  Koops;  2  Johns.  Ch.  Rep.  548,  Moody  v.  Payne;  4 
Vesey,  396;  2  V.  &  B.  301;  6  Mass.  Rep.  271,  Fisk  v. 
Herrick. 

It  is  therefore  clear  that  the  plaintifl^s  in  this  case  were 
entitled  to  have  the  partnership  property  of  Harris  and 
Blaisdell  api)lied  to  the  payment  of  their  execution  against 
the  firm,  in  preference  to  the  executions  which  has  issued 
against  the  individual  partners,  and  there  must  be  judgment 
on  the  verdict. 


568        ALIENATION  OF  INTERESTS  IN  PROPERTY 


PHILLIPS  7'.  COOK. 

In   the   Supreme   Court   of   Judicature   of   New 
York,  1840. 

24  WendcH's  Reports,  389. 

This  was  an  action  of  trespass  dc  bonis  aspovtatis, 
tried  at  the  Onondaga  circuit  in  September,  1837,  before 
the  Hon.  Daniel  Moseley,  one  of  the  circuit  judges. 

The  plaintiffs  made  title  to  the  property  in  question 
under  an  assignment  for  the  benefit  of  creditors,  executed 
to  tliem  by  Mrs.  A.  Ruoul,  a  meml)er  of  the  firm  of  A. 
Damaus  &  Co.  composed  of  herself  and  A.  Damans.  The 
assignment  was  executed  in  the  evening  of  the  eighth  day 
of  December,  1836.  The  business  of  the  firm  was  that  of 
druggists  and  booksellers,  and  by  the  assignment  executed 
by  Mrs.  Ruoul,  in  the  name  of  the  firm,  all  the  goods,  books, 
stationery,  drugs,  medicines,  and  all  other  property  in  the 
store  occupied  by  the  firm  in  the  village  of  Syracuse,  was 
transferred  to  the  plaintiffs.  The  firm  at  the  time  was  in- 
solvent. The  property  assigned  amounted  to  nearly  $5000. 
On  the  9th  December  the  plaintiffs  took  possession  of  the 
property  and  commenced  the  disposition  thereof  at  private 
sale  and  at  auction,  and  continued  to  do  so  until  30th  Jan- 
uai-y,  1837,  when  the  defendant,  as  a  deputy  of  the  sheriff 
of  the  county  of  Onondaga,  took  and  sold  goods  of  the 
value  of  $536.56,  and  delivered  the  same  to  the  purchasers. 
The  defendant  sold  the  goods  by  virtue  of  an  execution 
arainst  A.  Damaus,  one  of  the  members  of  the  firm  of  A. 
Damaus  &  Co.  who  absconded  abmit  the  first  day  of  No- 
vember, 1836.  The  defendant,  as  deputy  sheriff,  received 
the  execution  on  the  seventh  day  of  December,  1836,  and 
on  the  next  day  ///  the  morning  levied  upon  the  goods  in 
the  store  then  occupied  l)y  the  finn  of  A.  Damaus  &  Co. 
All,  however,  that  he  did  as  to  the  levy  was  to  go  into  the 


PHILLIPS  V.  COOK  569 

store  and  see  the  goods.  The  execution  was  for  $410. 
The  counsel  for  the  defendant  insisted  that  the  assignment 
was  void  as  against  a  creditor  who  had  caused  a  levy  to  be 
made  upon  the  individual  interest  of  one  of  the  partners  by 
virtue  of  an  execution,  and  at  all  events  that  trespass  would 
not  lie.  The  judge  charged  the  jury  that  the  assignment 
was  valid,  and  that  the  defendant  was  not  in  a  situation  to 
question  it ;  that  trespass  was  the  proper  action,  and  that  the 
plaintiffs  were  entitled  to  recover.  The  defendant  excepted 
to  the  charge,  and  the  jury  found  a  verdict  for  the  plain- 
tiffs for  $536.56.     The  defendant  asks  for  a  new  trial. ^ 

By  the  Court,  Cowen,  J. :  A  point  is  now  made 
on  the  validity  of  the  levy ;  but  it  was  not  raised  at 
the  trial ;  and  the  only  question  is  whether  trespass 
will  lie  against  the  sheriff  for  seizing  and  selling 
under  a  fi.  fa.  the  property  of  an  insolvent  firm,  to 
satisfy  the  individual  debt  of  one  of  the  members.  The 
action  here  is  the  same  as  if  it  had  been  brought  by  the 
partners,  it  being  by  trustees,  claiming  under  an  assign- 
ment made  subsequent  to  the  levy.  The  question  has  been 
a  good  deal  discussed  before  us  in  consequence  of  some 
apparent  conflict  in  the  cases,  and  a  difficulty  upon  them, 
felt  more  by  the  other  members  of  the  court  than  by  my- 
self. For  one  I  never  could  bring  myself  to  doubt  a  priori; 
nor  have  I  been  able  to  see  any  serious  discrepancy  in  the 
adjudications.  Not  a  single  direct  authority  has  been  shown 
for  maintaining  this  action:  nor  any  intimation  to  that 
effect,  although  the  question  stood  over  in  Thurber  v. 
Lewis,  for  several  terms,  under  directions  to  re-argue.  The 
whole  doctrine  is  gone  into  a  distinct  section  of  Collyer  on 
Partnership,  473,  to  478,  Am.  ed.  of  1839,  where  several  of 
the  most  material  cases,  English  and  American,  are  cited. 
The  result  is,  that  at  law,  the  sheriff  may  scice  and  sell  the 
interest  of  a  partner  in  all  choses  in  possession,  the  same  as 


'  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted, 
and,  because  of  its  great  length,  only  a  portion  of  the  opinion  is 
reprinted. 


570        ALIENATION  OF  INTERESTS  IN  PROPERTY 

he  may  that  of  any  joint  tenant,  or  tenant  in  common. 
Partners  are  joint  tenants  in  the  stock  and  all  the  effects; 
they  are  seized  per  mi  ct  per  tout.  Collyer,  64.  And  the 
rule  of  proceeding  expressly  laid  down  in  the  books  is,  that, 
under  a  fi.  fa.  against  one,  the  sheriff  must  seize  the  entire 
partnership  effects,  so  far  as  may  be  necessary  to  satisfy 
the  execution ;  he  must  sell  that  partner's  share  against 
whom  the  execution  is ;  and  then  the  vendee  becomes  tenant 
in  common  with  the  other  partner.  Backhurst  v.  Clinkard, 
I  Shower,  169.  Holt,  643,  S.  C.  Heyden  v.  Haydon,  i 
Salk.  392.  The  doctrine  of  these  cases  has  never  been 
doubted;  but  has  been  as  often  reaffirmed  as  the  question 
has  been  mentioned  by  courts  or  in  any  of  the  Treaties  on 
Partnership.  It  was  adjudged  in  Jacky  v.  Butler,  2  Ld. 
Raym.  871,  and  in  Marriott  v.  SJiaiv,  Com.  Rep.  275,  277. 
The  true  rule  was  laid  down  by  Holt,  Ch.  J.,  in  Pope  v. 
Haman,  Comb.  217:  "Upon  a  judgment  against  one  part- 
ner, the  sheriff  may  take  the  goods  of  both  in  execution; 
and  the  other  co-partner  hath  no  remedy  at  law,  otherwise 
than  by  retaking  the  goods,  if  he  can;  for  the  vendee  of  the 
sheriff  becomes  tenant  in  common  with  the  other  co-part- 
ner." This  is  but  saying  what  every  one  would,  who  has 
studied  the  text  of  Littleton,  Co.  Litt.  Sec.  323,  199,  b.  So 
far  as  this  section  and  Coke's  Commentary  pertain  to  the 
question,  they  are  both  adopted  in  St.  John  v.  Standring,  2 
Johns.  R.  468. 

It  does  not  appear  to  have  been  doubted  in  any  age  of 
the  law,  that  the  sheriff  might  take  and  sell  the  separate 
partner's  interest.  The  questions  have  been  whether  he 
might  not  sell  the  whole  interest  of  both,  on  a  fi.  fa.  against 
one ;  or  whether  he  could  seize  the  whole.  The  answers  in 
all  the  cases  have  been,  you  must  seize  the  whole,  and  sell 
only  the  moiety  belonging  to  the  debtor.  These  were 
called  old  cases  on  the  argument ;  the  antiquity  of  those 
cases  only  adds  to  their  strength.  They  are  all,  however, 
since  the  revolution  of  1688,  ranging  from  Wm.  and  Mary 
down  to  the  Georges.     They  were  cited  and  approved  by 


PHILLIPS  V.  COOK  571 

Lord  Kenyon,  in  Smith  v.  Stokes,  i  East,  363,  367.  More 
than  that,  they  were  expressly  affirmed  by  a  decision  of  this 
court,  Schrugham  v.  Carter,  12  Wendell,  131.  The  entire 
partnership  property  was  there  taken  under  an  execution 
against  one,  and  this  court  held  that  replevin  would  not  lie 
by  the  assignees  of  the  firm.  Savage,  Ch.  J.,  laid  down  the 
law^  as  it  was  understood  by  Holt,  Ch.  J.,  in  the  reign  of 
William  and   Mary. 

It  was  admitted  in  argument  that  the  sheriff  may  seize, 
but  it  was  said  that  neither  he  nor  the  purchaser  can  remove 
the  property.  Whereas  the  cases  at  law  are  all  express  that 
he  may  sell,  from  Holt  down  to  the  12  IVeudell.  The  dis- 
tinction sounds  singular  on  its  face.  For  what  purpose 
does  a  sheriff  seize  property  on  a  /z.  fa.  if  not  to  remove  and 
sell  it?  But  his  power  was  assailed  a  priori,  and  it  was 
said  he  can  exercise  no  greater  powder  over  the  property 
than  the  copartner  against  whom  the  execution  goes ;  that 
by  the  levy,  the  sheriff  is  but  a  tenant  in  common,  who 
must  wait  his  chance,  and  take  the  goods  when  he  can ;  but 
he  cannot  remove  them  if  his  co-tenant  be  unwilling  and 
hold  on  to  the  possession,  without  committing  a  breach  of 
the  peace.  If  this  were  so,  the  reason  would  be  a  perfect 
non  seqiiitur  as  to  the  right  of  suing  in  trespass  de  bonis, 
trover  or  replevin,  however  it  might  entitle  the  co-tenant 
to  sue  for  an  assault  in  wresting  the  property  from  him. 
Hyatt  V.  Wood,  4  Johns.  R.  150,  159,  160.  But  is  the  law 
so  absurd  as  to  command  a  sheriff  by  its  writ  to  seize  and 
sell  an  article,  yet  forbid  him  to  remove  it,  or  declare  him 
a  breaker  of  the  peace  for  selling  it,  because  he  resisted,  and 
put  to  the  exercise  of  force?  This  is  a  sort  of  imbecility 
which  the  common  law  has  been  careful  to  avoid  in  all 
cases.  When  it  directly  commands  an  officer  to  do  any  act, 
it  impliedly  gives  him  the  power  and  means  of  performing 
it,  and  in  nothing  is  this  rule  more  conspicuous  than  in  the 
execution  of  a  sheriff's  power.  But  it  cannot  be  necessary 
to  pursue  the  question  through  a  course  of  reasoning,  for 
the  sheriff's  right  at  law  is  settled  by  the  authority  of  this 


572         ALIEN'ATION  OF  INTERESTS  TN   TROPERTY 

coiirl.  inisoii  &  Gibbs  v.  Conine,  2  Johns.  R.  280,  is  not 
opposed  to  it.  There  both  the  partners  sued  in  trover  for  a 
seizure  upon  execution  against  one ;  but  they  recovered 
merely  because  the  defendant  failed  in  his  formal  proof  of 
the  decree  on  which  the  execution  issued.  On  motion  for 
a  new  trial,  the  preference  of  partnership  creditors  was 
recognized,  on  the  ground,  as  expressly  stated,  that  the 
motion  appealed  to  the  equity  of  the  court.  They  did  not 
pretend  to  deny  the  sheriff's  legal  right,  though  he  had 
seized  and  sold  a  consumable  article,  after  being  forbidden 
by  the  plaintiff,  and  the  purchaser  had  actually  taken  it 
away.  No  one  even  hinted  that  the  sheriff  wanted  the  le- 
gal power,  provided  his  authority  had  been  shown.  Vide 
per  Kent,  Ch.  J.  at  p.  282.  There  are,  I  concede,  some  re- 
spectable dicta  which  favor  an  action  at  law  by  the  partner 
who  has  been  thus  dispossessed :  the  action  being  in  his 
name  alone.  Such  is  that  of  Putnam,  J.,  in  Rice  v.  Austin, 
17  Mass.  R.  206,  7,  and  Parker,  J.  in  Gibson  v.  Stevens, 
7  N.  H.  Rep.  357,  8.  Putnam,  J.,  cited  no  authority,  and 
professedly  spoke  hypothetically.  The  point  was  not  raised 
and  finally  decided  in  either  of  the  cases;  and  Parker,  J., 
admitted  himself  to  be  speaking  on  a  difficult  branch  of 
the  law.  I  have  looked  into  the  three  cases  cited  by  him. 
Two  of  them  avowedly  go  on  the  ground  of  equity — im- 
pliedly therefore  admitted  the  law  to  be  different  from  what 
the  learned  judge  understood  it  to  be.  The  third  was  a 
case  of  tenants  in  common,  the  sheriff  having  expressly 
sold  the  whole  under  an  execution  against  one.  Melville 
V.  Brozvn.  15  Mass.  Rep.  82.  Vide  White  v.  Osborn,  21 
Wendell,  y2  S.  P.  as  to  a  sale  of  the  whole  by  one  of  two 
tenants  in  common.  It  would  be  different,  even  in  such  a 
case,  should  the  sheriff  sell  only  the  proper  .share,  though 
he  seized  the  whole,  as  he  must.  Clearly  it  cannot  be  de- 
nied that  a  copartner  has  as  great  an  interest  at  law,  and 
even  a  greater  than  a  simple  tenant  in  common,  nor  that  if 
the  sheriff  can  on  a  /z.  fa.  against  one  of  several  tenants  in 
common,  take  the  whole  chattel  and  sell  the  moiety  in  de- 


J 


PHILLIPS  V.  COOK  573 

spite  of  opposition  ivoiu  the  co-tenant,  he  may  do  so  as 
against  the  co-partner.  That  he  may  do  it  in  the  former 
case  was  (hrectly  held  in  Mcsscrcau  v.  Norton,  15  Johns. 
R.  179.  He  had,  nnder  an  attachment  against  one  tenant 
in  common,  seized  and  taken  a  yoke  of  oxen  from  the  ac- 
tual possession  of  the  other,  and  proceeded  to  sell  them ; 
and  they  were  taken  away  by  the  purchaser,  though  the  co- 
tenant  forbade  the  sale.  He  brought  trespass;  but  this 
court  held  it  would  not  lie,  citing  as  authority  the  very  case 
of  Hcydoii  V.  Hcydoii,  respecting  the  sheriff's  authority 
against  one  of  several  partners.  In  Shaver  v.  White,  6 
Munf.  no,  the  attachment  was  sued  out  against  one  of 
two  partners,  and  300  head  of  cattle  taken  by  the  sheriff 
out  of  the  possession  of  both ;  and  they  both  brought  tres- 
pass for  the  taking.  The  action  was  against  the  plaintiff 
in  the  attachment  who  directed  the  sheriff  to  levy.  The 
court  held  that  the  action  would  not  lie,  and  pronounced 
their  opinion,  also,  that  it  could  not  be  maintained  against 
the  sheriff,  citing  Heydon  v-  Heydoii.  The  argument  for 
such  an  action  goes  the  length  of  saying  that  when  a  man 
puts  his  property  into  partnership,  it  is  absolutely  pro- 
tected against  a  levy  at  the  suit  of  his  individual  creditors; 
that  it  is  exempt  from  execution  like  his  ten  sheep  or  his 
cow  under  the  statute.  A  debtor  has  but  to  form  a  part- 
nership, and  he  may  set  executions  at  defiance  so  far  as  his 
own  debts  are  concerned,  still  possessing  and  trading  upon 
that  very  capital  contriljutcd  by  his  individual  creditors. 
It  was  thought  singular  by  a  learned  judge  in  Pennsylvania, 
that  e\en  the  qualified  exemption  allowed  in  such  a  case 
by  a  court  of  chancery  should  not  have  been  repudiated 
as  contrary  to  the  statute  against  transfers  to  defraud 
creditors.  He  said,  *^that  a  contract  which  enables  the  par- 
ties to  keep  a  class  of  their  creditors  at  bay,  and  yet  re- 
tain the  indicia  of  ownership,  should  not  have  been  deemed 
witln'n  the  statute  of  Elizabeth,  is  attributable  exclusively 
to  the  disposition  universally  manifested  by  the  courts  of 
justice  to  encourage  trade."     Gibson,  Ch.  J.  in  Doner  v. 


574         ALIENATION  OF  INTERESTS  IN   PROPERTY 

Staujfcr,  2  Penn.  R.  204.  To  give  an  action  of  trespass 
by  the  partners,  would  make  the  contract  equivalent  to  the 
protection  afforded  by  the  owner's  dwelling  house.  It 
would  be  putting  it  under  perpetual  lock  and  key  as  to  all 
his  private  debts. 

It  is  supposed  that  Dob  v.  Halscy,  16  Johns.  R.  34, 
gives  countenance  to  this  action.  That  was  assumpsit  by 
two  out  of  three  partners,  to  recover  the  price  of  goods 
sold  by  a  third,  because  he  had  turned  them  out  in  pay- 
ment of  his  private  debt.  The  plaintiffs  were  non-suited, 
on  the  ground  that  all  the  partners  had  not  joined.  The 
action  was  a  singular  one.  The  decision  seems  to  suppose 
that  after  a  partner  has  sold  the  goods  of  the  firm  in  pay- 
ment of  his  honest  debt,  without  any  fraud  as  against  him- 
self, he  may  join  his  co-partners  in  an  action  to  recover 
the  price  of  the  goods — a  price  which,  when  recovered,  he 
may  release,  or  still  use  the  avails  for  his  individual  bene- 
fit. Admitting  his  co-partners  to  have  been  defrauded  by 
the  sale,  a  bill  in  equity  against  him  and  the  vendee,  would 
seem  to  be  the  more  obvious  remedy.  In  Rodcriqucs  v. 
Hcjfcnian,  5  Johns.  Ch.  R.  417,  a  bill  was  filed  and  relief 
obtained  in  that  form,  for  such  an  injury.  The  state  of 
accounts  between  the  partners  should  be  inquired  into,  and 
if  the  firm  be  not  injured,  the  vendee  should  not  be  dis- 
turbed. He  has  obtained  no  more  than  the  law  would  give 
him,  on  execution  against  the  man  from  whom  he  re- 
ceived the  goods.  Independently  of  an  account,  and  es- 
pecially where  the  action  at  law  is  in  the  name  of  all  the 
partners,  I  cannot  but  think  the  decision  of  the  supreme 
court  of  appeals  of  Kentucky  in  Owings  &  Co.  v.  Trotter, 

1  Bibb,  157,  denying  an  action  to  the  firm,  more  in  ac- 
cordance with  the  law  and  justice  of  the  case. 

In  the  State  of  Vermont,  all  preference  of  partners  or 
their  creditors  by  way  Of  lien  over  an  attachment  or  exe- 
cution for  the  debt  of  a  sole  partner  has  been  entirely  re- 
pudiated, both  at  law  and  in  equity.     Rccd  v.  Shcpardson, 

2  Verm.  R.  120. 


PHILLIPS  V.  COOK  575 

On  the  other  hand,  there  is  no  doubt  of  the  equitable 

rule  in  England,   New  York  and  most  of  the  states,  that, 

though  the  sheriff  may  at  law  levy  on  and  sell  the  right  of 

tRe  individual  partner,   which  shall  pass  absolutely  to  the 

purchaser,  yet  he  takes  subject  to  an  account  between  the 

partners,   which  if  it  eventuate '  against  him,   his  purchase 

may  go  for  nothing.     That,  however,  is  his  own  look  out. 

It  is  no  reason  why  the  creditor  should  be  deprived  of  his 

legal   right  to  sell,  or  the  purchaser  of  his   right  to  buy. 
*     *     * 

I  admit  that  courts  of  law  have  sometimes  felt  able  to 
apply  this  equitable  doctrine.  One  instance  is,  where  an 
action  for  a  false  return  was  brought  against  the  sheriff, 
on  the  ground  that  he  had  omitted  to  levy  on  partnership 
property  under  process  of  domestic  attachment  or  fi.  fa. 
against  an  individual  partner.  Dunham  v.  Murdock,  2 
Wendell  553.  Pierce  v.  Jaekson,  6  Mass.  R.  242.  Phil- 
lips V.  Bridge,  11  Mass.  R.  242,  249.  Couunercial  Bank  v. 
W'ilkins,  9  Greenl.  28.  Tappan  v.  Blairsdell,  5  N.  Hamp. 
R.  189.  This  is  on  the  obvious  ground  that  the  plaintiff 
has  lost  nothing  but  that  of  which  a  court  of  chancery 
would  have  deprived  him ;  and  the  sheriff  ought  not  to  be 
held  accountable  for  doing  what  the  court  of  law  sees  that 
a  court  of  equity  would  have  compelled  him  to  do.  So  the 
equitable  right  was  tried  at  law  where  a  partner  sold  out 
his  share,  covenanting  against  liens ;  the  balance  on  an  ac- 
count, inter  se,  was  decidedly  against  him,  for  which  it  was 
held  his  co-partner  had  a  lien,  and  so  the  covenant  violated. 
Hodges  v.  Holeuian,  i  Dana,  50,  53.  Other  like  instances 
exist,  some  of  which  I  shall  hereafter  have  occasion  to 
notice. 

It  is  said  this  court  is  in  the  habit  of  arresting  the 
sheriff's  proceedings,  on  the  application  of  the  debtor's 
partner,  that  it  will  order  an  account  to  be  taken  by  the 
clerk,  and  then  direct  the  sheriff  to  pay  such  share  of  the 
proceeds  to  the  co-partner  or  shall  appear  to  be  his  due. 
Something  like  this  was  indeed  done  in  Eddie  v.  Davidson, 


576         ALIENATION  OF  INTERESTS   IN   PROPERTY 

Donghl.  650.  The  case,  however/ recognized  the  sheriff's 
right  to  sell,  and  the  order  was  in  terms  to  pay  a  part  of 
the  money  levied,  to  the  assignees  of  the  co-partner.  The 
assignees  obtained  the  order.  A  like  order  was  made  A. 
D.  1 81 6,  in  The  King  v.  Rock,  2  Price,  198,  on  motion  by 
partners ;  and  the  court  said  there  had  been  many  instances 
of  such  a  reference,  but  they  denied  an  aniovcas  inanus, 
thus  recognizing  the  right  to  sell.  Vide  note,  id.  198.  Lord 
Eldon  said,  A.  D.  181 3,  in  Jl'afers  v.  Taylor,  2  Vesey  & 
Beames,  301,  "According  to  the  old  law,  I  mean  before 
Lord  Mansfield's  time,  the  sheriff,  under  an  execution 
against  partnership  effects,  took  the  undivided  share  of  the 
debtor  without  reference  to  partnership  accounts:  but  a 
court  of  equity  would  have  set  that  right  by  taking  an  ac- 
count, and  ascertaining  what  the  sheriff  ought  to  have  sold. 
The  courts  of  law,  however,  have  now  repeatedly  laid  down 
that  they  will  sell  the  actual  interest  of  the  partner,  pro- 
fessing to  execute  the  equities  between  the  parties,  but  for- 
getting that  a  court  of  equity  ascertained  previously  what 
was  to  be  sold.  How  could  a  court  of  law  ascertain  what 
was  the  interest  to  be  sold,  and  what  the  equities;  depend- 
ing on  an  account  of  all  the  partners  for  years?"  The 
action  of  the  courts  of  law,  however,  seems  not  to  have 
been  l\v  any  means  so  uniform  as  Lord  Eldon  supposed. 
The  rule  alluded  to  by  him  had  been  applied  for  to  the 
chief  baron  in  Chapman  v.  Brooks,  3  Bos.  &  Pull.  289,  but 
the  application  was  unanimously  refused ;  the  court  all  say- 
ing the  question  belonged  to  a  court  of  equity ;  that  they 
had  no  power  to  take  an  account :  and  that  the  sheriff  had 
a  perfect  right  to  go  on  and  sell.  Lord  Alvanley  said  he 
hoped  that  would  be  the  last  application  of  a  similar  kind. 
[See  two  like  cases  before  that  in  the  same  book,  pp.  254 
and  288.]  Chambre.  J.  mentioned  that  in  Eddie  v.  David- 
son, no  objection  was  made  to  the  sale;  but  there  was 
merelv  an  application  for  a  share  of  the  proceeds  after 
sale :  and  no  objection  t(^  the  motion  by  the  party  levying. 
In  Parker  v.  Pistor,  3  Bos.  &  Pul.  288,  289,  the  court  said 


PHILLIPS  7'.  COOK  577 

all  the  difficulties  were  to  be  encountered  in  equity,  the  case 
being  plain  at  law.  "That  the  safest  line  of  conduct  for 
the  sheriff  to  pursue,  was  to  put  some  person  in  possession 
of  the  defendant's  share  as  vendee,  leaving  him  and  the 
parties  interested,  to  contest  the  matter  in  equity,  where  a 
bill  might  be  filed  stating  that  he  had  taken  possession  of 
the  property,  and  praying  that  it  might  not  be  disposed  of 
until  all  the  claims  were  arranged."  This  appears  to  be 
the  approved  practice  in  Connecticut.  Witter  v.  Richards, 
lo  Conn.  R.  37,  43,  per  Williams,  J., who  cites  and  ap- 
proves the  direction  in  Parker  v.  Pistor.     *     *     * 

It  seems  to  me  the  English  common  pleas  were  right 
when  they  said  the  conflict  between  suitors  for  joint  and 
separate  debts  can  be  settled  by  chancery  alone.  Creditors 
and  partners  not  before  the  court  must  be  made  parties, 
complicated  accounts  for  years  must  be  settled,  a  large  con- 
cern to  be  W(^und  uj)  ])erha])s.  This  court  has  neither  the 
abstract  power,  the  process,  the  officers,  nor  any  of  the 
proper  machinery  for  prosecuting  such  a  business.  How 
is  this  court  to  decide  on  motion,  even  whether  there  be  a 
partnership  or  not  ?  Be  this  as  it  may,  however,  and 
whether  we  ought  ever  to  interfere  summarily  or  not,  the 
argument  can  have  no  bearing  in  favor  of  this  novel  rem- 
edy by  trespass  or  trover. 

My  ojMuion  is  that  a  new  trial  should  1)e  granted;  the 
costs  to  abide  the  event.- 


'  Compare:  Fcnton  v.  Folgcr,  21  Wend.  676,  1840.  (A  and  B  were 
partners.  C,  a  separate  creditor  of  A,  issued  execution  on  partnership 
property.  D,  a  tirni  creditor,  tlien  issued  execution  on  the  same  prop- 
erty. There  was  not  time  for  the  Sheriff  to  advertise  the  sale  under  D's 
execution  hefore  he  sold  the  property  under  C's  execution.  Held  by 
the  court,  Nelson,  C.  J.,  that  D  had  no  interest  in  the  proceeds ;  but 
that  had  the  Sheriff  sold  the  property  upon  both  executions  at  the  same 
time,  D.  as  a  firm  creditor,  would  have  had  a  preference  on  the 
proceeds.) 

Cooper's  Appeal,  26  Pa.  262,  1856.  (A  and  F>  were  partners,  A 
having  invested  $19,082.61  and  B  $1,714.26.  C,  a  separate  creditor  of  A; 
D,  a  separate  creditor  of  B,  and  E,  a  creditor  of  the  firm,  all  issued 
executions  and  levied  on  firm  property  in  the  order  named.  The  prop- 
erty was  sold  by  the  Sheriff  jointly  under  all  executions.  The  court  on 
appeal  directed  that  the  joint  creditor  be  paid  first,  and  that  the  balance 
be  divided  between  C  and  D  according  to  the  interest  of  A  and  B  in 
the  I'lrm  property;  and  that  as  B  in  a  settlement  of  partnership  accounts 


578        ALIENATION  OF  INTERESTS  IN  PROPERTY 

would  not  have  been  entitled  to  anything,  his  execution  creditor  had  no 
interest  in  the  proceeds  of  the  sale,  and  the  entire  balance  should  be 
awarded  to  C.) 

Stcrrett  v.  Third  National  Bank  of  Buffalo,  46  Hun.  22,  1887.  (A 
and  B  were  partners.  In  the  course  of  the  business  they  gave  firm  notes 
to  C  and  as  collateral  certain  pipe  line  certificates  belonging  to  the  firm. 
A  was  indebted  to  C.  C  brought  an  action  against  A,  recovered  judg 
ment  and  caused  a  levy  to  be  made  on  the  certificates.  A  and  B  paid 
the  notes  and  demanded  the  certificates,  which  demand  was  refused. 
A  and  B  sued  C  for  a  conversion  of  the  certificates.  The  only  question 
of  fact  tried  in  the  case  was  whether  the  firm  of  A  and  B  was  insolvent 
when  C  caused  the  certificates  to  be  attached.  The  firm  having  been 
determined  to  be  insolvent,  the  court  held  that  therefore,  A  as  an 
individual  had  no  interest  in  the  firm  property  which  was  subject  to 
attachment.     Judgment  for  plaintifTs.) 


( 


WASHBURN  V.  BANK  OF  BELLOWS  FALLS  579 


WASHBURN  V-  BANK  OF  BELLOWS  FALLS. 
In  the  Supreme  Court  of  Vermont,  1847. 

19  Vermont  Reports,  278.' 

Redfield,  J. :  This  is  a  bill,  brought  by  the  creditors 
of  a  partnership,  on  the  part  of  themselves  and  so  many  as 
may  join  in  the  suit  claiming  a  preference  over  the  separate 
creditors  of  the  partners,  and  that  the  latter  may  be  restrained 
from  levying  upon  the  partnership  effects,  until  the  claims 
of  the  plaintiffs  are  satisfied.  The  Bellows  Falls  Bank  is  the 
first  in  the  order  of  the  attachments,  and  that  and  the  other 
creditors  of  the  separate  partners  are  sufficient  to  absorb 
all  the  funds  of  the  partnership,  which  have  been  reduced  to 
cash  by  the  receiver.  The  other  separate  creditors  have 
attached  subsequqently  to  the  bank ;  and  the  plaintiffs,  who 
are  partnership  creditors,  have  also  attached,  subsequent  to 
the  bank  and  some  other  of  the  separate  creditors.  All  these 
claims  have  gone  into  judgments,  and  the  sum  of  the  plain- 
tiffs' claims,  united,  is  also  sufficient  to  absorb  the  partner- 
ship funds.  So  that  the  controversy  in  the  present  case  is  to 
the  full  extent  of  all  the  property  attached. 

No  question  can  be  reasonably  made,  I  think,  in  regard 
to  the  failure  and  fitter  insolvency  of  the  partnership,  at  the 
time  of  the  first  attachment  by  the  bank,  although  there  is 
some  testimony  in  the  case,  going  upon  the  basis  of  a  very 
imperfect  and  unequal  estimate  of  assets  and  liabilities, 
which  would  lead  to  the  contrary  result.  The  only  real 
difficulty  in  this  case  is,  to  determine  whether  the  partner- 
ship creditors  are  entitled  to  a  preference  over  the  separate 
creditors  of  the  partners,  in  the  distribution  of  the  partner- 
ship funds.     And  this,   I   apprehend,    could    not    now    be 


'  The  Reporter's  statement  of  the  facts  of  the  case  and  his  notes 
of  the  arguments  of  counsel  are  omitted.  A  part  only  of  the  opinion  of 
the  court  is  reprinted. 


580        ALTKNATTON  OF  INTERESTS  IN  rROPERTV 

esteemed  a  question  of  any  difficnlty,  upon  the  principles  of 
tlie  English  common  law.     *     *     * 

We  think,  therefore,  that,  in  this  case,  the  partnershij) 
creditors  are  entitled  to  a  preference  over  the  separate 
creditors,  who  first  attached.  The  decree  of  the  chancellor 
is  therefore  reversed,  and  the  cause  remanded  to  him,  witlr 
directions  to  enter  up  a  decree  for  the  orators  to  be  paid 
their  debts  out  of  the  partnership  funds,  to  the  full  extent, 
if  the  money  in  the  hands  of  the  receiver  is  sufficient  for 
that  purpose,  and  the  residue,  if  any,  to  be  paid  to  the 
creditors  of  the  separate  partners,  until  expended,  in  the 
order  of  their  attachments;  and  if  the  funds  in  the  hands  of 
the  receiver  are  not  sufficient  to  pay  all  the  orators'  claims, 
then  to  be  paid  to  them,  in  proportion  to  the  amount  of  their 
demands,  as  far  as  it  will  go.^ 


'Compare:  Cammack  v.  Johnson,  2  N.  J.  Eq.  163,  1839.  (Chan- 
cellor Pennington :  "A  question  has  indeed  been  made,  whether  an 
injunction  ought  to  issue  to  stay  an  execution  at  law  against  one  of  the 
partners  from  selling  the  partnership  property,  for  the  reason,  that  such 
sale  could  only  reach  the  interest  of  such  partner,  which  must  of  course 
be  in  the  residue,  after  discharging  all  the  partnership  debts  :  in  other 
words,  because  the  sale  could  only  place  the  purchaser,  as  to  the  prop- 
erty, in  the  same  situation  that  the  defendant  in  the  execution  was  prior 
to  such  sale.  Chancellor  Kent,  in  the  case  of  Moody  v.  A  and  H.  Payne. 
2  Johns.  Ch.  Rep.  548,  refused  to  interfere  in  such  case;  but  in  i  Story's 
Equity,  628,  it  will  be  seen,  that  learned  author  reviews  this  decision, 
and  takes  the  opposite  side  of  the  question,  insisting  that  it  is  a  proper 
case  for  injunction.  His  reasoning  is  very  strong,  especially  as  applcable 
to  personal  property.  He  says,  'It  may  be  extremely  difficult  to  follow 
the  property  into  the  hands  of  various  vendees ;  and  their  lien  may 
perhaps  be  displaced,  or  other  equities  arise  by  intermediate  bona  fide 
sales  of  the  property  by  the  vendees,  or  purchasers  without  notice ;  and 
the  partners  may  have  to  sustain  all  the  chances  of  any  supervening 
insolvencies  of  the  immediate  vendees.'  For  these  reasons,  to  prevent 
multiplicity  of  suits  and  irreparable  mischiefs,  he  is  in  favor  of 
restraining  the  sale  altogether.  When  such  men  differ,  it  is  indeed 
difficult  to  decide;  though  I  confess  the  reasoning  of  Justice  Story,  as 
applied  to  the  case  of  chattels,  appears  to  me  extremely  forcible  and 
just." 

Greemvood  v.  B  rod  head.  8  Barb.  593.  1850.  (A  et  al.,  alleging  that 
they  were  partnership  creditors  of  B  and  C,  brought  a  bill  in  equity  to 
compel  the  application  of  the  proceeds  of  the  partnership  property  to  the 
payment  of  partnership  debts.  The  defeiklants  were  the  partners,  tlie 
assignee  of  an  individual  partner,  and  his  vendee.  Demurrer  sustained. 
Parker,  J.:  "I  think  the  true  rule  is  this.  To  authorize  any  person  to 
demand  the  aid  of  this  court  in  directing  the  application  of  partnership 
property,  he  must  have  a  lien,  either  legal  or  equitable  upon  it,  or  must 
be  in  a  situation  to  assert  such  a  lien.  One  of  the  partners  may  file  a 
bill  in  the  first  instance,  against  his  copartners  to  compel  an  account  and 


I 


WASHBURN  V.  BANK  OF  BELLOWS  FALLS  581 

the  marshalling  of  assets.  He  does  so  by  virtue  of  his  lien  upon  the 
whole  funds  of  the  partnership,  for  the  balance  finally  due  him,  after 
payment  of  the  partnership  debts.  (Story's  Eq.  Jur.,  Sec.  675.)  So  the 
creditor  must  proceed  to  obtain  a  lien  on  the  property  before  he  j:an 
interfere  to  control  it.  If  it  be  real  estate,  he  obtains  the  lien  by 
judgment;  if  personal  property  liable  to  execution,  by  levy  under  such 
process  :  and  if  choses  in  action,  by  the  return  of  an  execution  unsatis- 
fied and  filing  a  complaint.  {Corning  v.  White,  2  Paige,  567;  Edmcston 
V.  Lyde,  i  Id.  637;  Wakeinan  v.  Graver,  4  Id.  23.)  Until  such  lien  is 
obtained  the  partners  have  full  power  to  make  any  bona  fide  sale  of  the 
property  they  think  proper.  But  when  such  lien  exists  the  creditor  may 
claim  the  aid  of  this  court,  to  restrain  the  disposition  of  the  property, 
by  injunction,  to  have  it  placed  in  charge  of  a  receiver,  and  to  compel 
its  equitable  application.  This  law  has  not  been  changed  by  the  code.") 
Accord:    Crippen  v.  Hudson,  13  N.  Y.  161,  1855. 

Hubbard  v.  Curtis,  8  Iowa,  i,  1859.  (A  and  B  were  partners.  C,  a 
separate  creditor  of  B,  levied  on  partnership  goods.  A,  alleging  that  the 
assets  of  the  firm  were  insufficient  to  meet  its  obligations,  brought  a  bill 
to  restrain  the  SheriiT  from  interfering  with  the  property  of  the  firm, 
to  dissolve  the  firm,  and  appoint  a  receiver  to  take  charge  of  all  the 
assets.  The  Sherifif  was  allowed  to  sell  the  property  attached,  subject 
to  the  liability  to  pay  the  partnership  debts.  Subsequently,  on  final 
hearing,  it  was  decreed  tliat  the  firm  be  dissolved,  'a  receiver  appointed  ;' 
that  the  Sheriff  deliver  to  the  receiver  any  goods  of  the  firm  not  sold 
by  him,  and  that  the  purchaser  of  goods  of  the  firm  sold  by  the  Sheriff 
under  the  interlocutory  order  deliver  said  goods  to  the  receiver,  and  be 
enjoined  from  further  intering  in  relation  to  the  same.) 

Harney  v.  First  Xational  Bank.  52  N.  J.  Eq.  697,  1894.  (A  and  B 
were  partners.  Land  was  conveyed  to  them  as  tenants  in  common,  but 
was  treated  by  them  as  part  of  the  assets  of  the  firm.  C,  a  separate 
creditor  of  B,  secured  a  judgment  against  B  and  levied  on  the  land. 
The  executors  of  A  brought  a  bill  in  equity  against  B  and  C  and  secured 
a  decree  subjecting  the  land  to  the  payment  of  partnership  debts  before 
the  satisfaction  of  C's  judgment,  the  court  holding  that  the  equity  of 
the  partner  to  have  the  partnership  assets  applied  to  the  payment  of 
partnership  debts  was  superior  to  the  right  of  the  judgment  creditors  of 
his  copartner,  and  that  an  express  trust  for  the  firm  was  not  necessary 
where  the  legal  title  was  in  the  partners  as  tenants  in  common.  On  this 
last  point  see  Foster  v.  Barnes,  81  Pa.  377,  1876,  contra.) 


582        ALIENATION  OF, INTERESTS  IN  PROPERTY 


NIXON  V.  NASH. 
In  the  Supreme  Court  of  Ohio,  i86i. 

12  Ohio  State  Reports,  647.' 

Peck,  J. :  The  petition  was  filed  in  this  cause,  by  a 
judgment  creditor  of  one  member  of  a  mercantile  firm,  to 
enforce  a  lien  created  by  the  levy  of  an  execution  upon  his 
debtor's  interest  in  the  firm,  prior  to  any  sale  upon  execution 
of  the  interest  so  levied  on. 

The  demurrer  to  the  petition  raises  several  questions, 
the  most  important  of  which  are  : 

1.  Whether  the  separate  creditor,  by  such  levy,  acquires, 
at  law,  any  lien  upon  his  debtor's  interest  in  the  joint  assets, 
and  if  so,  its  nature  and  extent? 

2.  Whether  such  separate  creditor,  after  the  levy  and 
before  the  sale,  can  invoke  the  equity  powers  of  the  court, 
to  ascertain  the  extent  of  the  debtor  partner's  interest  in 
the  goods  thus  seized  ? 

Each  partner  has  a  legal  interest  and  right  of  posses- 
sion, as  to  all  the  joint  assets,  and  it  would  be  strange, 
indeed,  and  contrary  to  public  policy,  if  such  an  interest 
could  not  be  seized  and  subjected  to  the  payment  of  any 
judgment  against  him.  To  hold  otherwise,  would  place  it 
in  the  power  of  an  unscrupulous  debtor,  by  entering  into 
such  relations,  to  screen  his  property,  or  to  so  hedge  the 
approaches  to  it,  as  to  render  it  almost,  if  not  altogether, 
inaccessible  to  his  creditor.  This,  justice  and  sound  policy 
will  not  permit,  and,  accordingly,  we  find  it  universally 
admitted,  that  the  interest  of  a  partner  in  the  tangible  prop- 
erty of  a  firm,  is  liable  to  seizure,  upon  execution,  in  favor 
of  his  separate  creditor.  Mayhezv  v.  Herrick,  62  Eng.  C.  L. 
(7  M.  &  G.)  240;  IVhite  v.  Woochvard  &  Rand,  8  B.  Mon. 


'  The  Reporter's  statement  of  the  facts  of  the  case  is  omitted. 


NIXON  V.  NASH  583 

485;  Phillips  V.  Cook,  24  Wend.  389;  Scrughan  v.  Carter, 
12  Wend.  131;  Wash  v.  Adams,  3  Denio,  125;  Church  v. 
Knox,  2  Conn.  514:  Ncwhall  v.  Buckingham,  14  111.  405; 
Whitney  v.  Ladd,  10  Verm.  165;  Knox  et  al.  v.  Sumner, 
4  Yeates,  477 ;  Moore  &  Co.  v.  Sample,  3  Ala.  319 ;  Burgess 
V.  Atkins,  5  Blackf.  377;  Dra/  v.  Boguc,  20  Penn.  St.  228; 
Place  V.  Siveetzer  et  al.  16  Ohio  Rep.  142  ;  Collyer  on  Part, 
sec.  822,  <??  j-cg.;  Story  on  Part.  sec.  261,  r;^  seq.;  i  Parson's 
on  Cont.  176,  et  seq. 

But  while  the  right  to  levy  is  thus  conceded,  the  author- 
ities differ  widely,  as  to  the  course  to  be  pursued  by  the 
creditor  and  the  officer  executing  the  writ. 

In  some  cases,  the  right  of  the  officer  to  take  the  goods, 
even  temporarily,  out  of  the  immediate  possession  and  con- 
trol of  the  other  partners,  is  denied,  and  in  others,  a  tem- 
porary interruption  of  their  possession,  in  order  to  take  an 
inventory,  is  reluctantly  permitted ;  still  the  decided  weight 
of  authority  seems  to  be,  that  the  officer  may,  and,  for  his 
own  security  and  that  of  the  execution  creditor,  should  take 
possession  of  all  the  chattels  levied  on,  and  after  the  sale 
of  the  debtor's  interest  therein,  re-deliver  the  same  to  the 
other  partners  and  the  purchaser,  who  are  said  to  be  tenants 
in  common  of  the  chattels  so  sold. 

The  levy  and  sale  must  be  of  an  undivided  interest  in 
the  chattel,  corresponding  to  the  debtors  share  or  nominal 
interest  in  the  firm ;  but  it  is  also  well  settled,  that  the  sep- 
arate creditor  or  the  ]5urchaser  at  such  sale,  acquires  only  the 
beneficial  interest  of  the  debtor  partner  in  the  articles  sold. 
Each  partner  holds  his  interest  in  the  joint  property,  subject 
to  a  trust  for  the  partnership  creditors,  and  the  claims  of  his 
several  co-partners ;  so  that  the  beneficial  interest  of  each, 
is  his  residuary  share  after  the  partnership  accounts  are  set- 
tled and  their  rights,  inter  sese,  adjusted. 

The  seizure  and  sale  is,  pro  tanto,  at  least,  a  dissolution 
of  the  partnership,  and  calls  for  an  adjustment  of  the  joint 
business.  If  the  partnership  is  then  entirely  solvent,  the 
l)eneficial  interest  of  the  debtor  in  the  articles  sold,  may 
equal  his  proportionate  share  in  the  joint  business;  but  if 


584        ALIENATION  OF  INTERESTS  IN  PROPERTY 

not  so,  a  part,  if  not  the  whole,  of  his  interest  therein,  may 
be  required  to  hquidate  the  balance  due  from  him  on  the 
final  adjustment. 

Inasmuch  as  the  levy  and  sale  must  be  of  an  undivided 
part  of  the  chattel,  equal  to  the  debtor's  original  interest  in 
the  joint  lousiness,  while  the  purchaser  acquires  oj^ly  the 
present  beneficial  interest  of  the  debtor,  it  is  manifest,  that 
the  uncertainty  as  to  the  extent  of  that  interest,  niust  ser- 
iously embarrass  the  sale.  It  would,  doubtless,  be  much  bet- 
ter for  all  parties,  if  the  l)eneficial  interest  of  the  debtor 
could  be  ascertained  before  the  property  is  ofifered  for  sale, 
especially  if  there  is  any  reason  to  apprehend,  that  the  bene- 
ficial interest  of  the  debtor  is  much  disproportioned  to  his 
apparent  interest. 

Courts  of  law  are  not  provided  with  suitable  means 
for  adjusting  the  complicated  accounts  pf  a  partnership 
(Story  on  Part.,  sec.  262),  though  it  seems  that  the  court 
of  king's  bench  has,  in  some  instances,  c^irected  the  taking 
of  such  account  previous  to  a  sale.  Collyer  on  Part.,  sec. 
827. 

The  separate  creditor  acquired,  Jjy  his  levy,  a  lien 
upon  the  legal  interest  in  possession  of  his  debtor,  but 
owing  to  the  conflicting  rights  and  interests  of  the  other 
partners,  that  lien  can  not  be  precisely  ascertained  nor  ade- 
quately enforced  at  law.  On  general  principles,  then  as 
well  as  in  analogy  to  the  relief  granted  in  equity,  in  cases 
of  conflicting  liens  upon  real  estate,  requiring  the  adjustment 
of  complicated  accounts  and  a  mars|ialing  of  assets,  it  would 
seem  that  either  party,  the  creditor  or  the  other  partner, 
should  have  the  right,  of  petition,  f:o  require  a  settlement  of 
the  partnership  account,  and  an  ascertainment  of  the  bene- 
ficial interest  of  the  debtor  partner,  before  that  interest  is 
subjected  to  a  sale. 

Judge  Story,  in  section  263  of  his  treatise  on  partner- 
ships, while  treating  of  the  levy  of  an  execution  by  the 
creditor  of  one  partner,  upon  that  partner's  interest  in  the 
joint  property,  says:  "the  judgment  creditor  himself  may 
file  a  bill  against  the  other  partners,  for  the  ascertainment  of 


NIXON  V.  NASH  585 

the  quantity  of  that  interest,  before  any  sale  is  actually 
made  under  the  execution." 

It  was  held,  indeed,  in  Moody  v.  Paine,  2  Johns.  Ch. 
548,  that  one  copartner  could  not  file  a  bill  against  the  sepa- 
rate creditor  of  his  copartner,  who  had  levied  an  execution 
upon  that  partner's  interest  in  the  joint  property,  for  an 
account  of  the  partnership,  and  to  enjoin  a  sale  until  the 
taking  of  such  account.  Judge  Story,  in  commenting  upon 
this  decision,  in  section  264  of  his  said  treatise,  arrives  at 
the  conclusion,  and  we  think  correctly,  that  the  decision  in 
Moody  V.  Paine  is  unsound  in  principle,  and  not  sustained  by 
the  authorities. 

In  Place  v.  Sivcctccr  ct  al.,  16  Ohio  Rep.  142,  it  was 
also  held  that  a  bill  might,  in  such  case,  be  filed  by  a  partner 
against  the  separate  creditor  of  a  copartner,  to  restrain  a 
sale  upon  execution,  until  an  account  could  be  taken  of  the 
partnership  and  the  beneficial  interest  of  the  debtor  partner 
ascertained. 

In  Sutcliffe  v.  Dohnnan,  18  Ohio  Rep.  181,  the  court 
reviews  and  fully  approves  of  the  decision  in  Place  v. 
Szveetcer,  as  correct  in  principle;  and  upon  page  186  says, 
that  the  creditor  also  had  an  equal  right  to  appeal  to  a  court 
of  chancery  by  bill,  to  have  his  rights  determined  in  relation 
to  the  property,  instead  of  resorting  to  a  sale  under  the 
execution. 

It  is  clear,  we  think,  upon  principle  and  upon  author- 
ity, that  the  levying  creditor,  in  the  case  at  bar,  having 
acquired  a  lien  by  the  seizure,  in  execution,  of  his  debtor's 
interest  in  the  tangible  property  of  the  firm,  might  properly 
file  his  petition  against  the  other  partner  for  an  account  of 
the  i)artnership  and  the  ascertainment  of  his  debtor's  interest 
in  the  property  seized,  before  a  sale  upon  execution. 

The  rule,  in  Ohio  at  least,  seems  therefore  to  be,  that 
upon  such  levy  being  made,  it  is  the  right  of  the  creditor  and 
of  the  other  copartners,  should  either  desire,  to  invoke  the 
the  equity  powers  of  the  court  to  adjust  the  partnership  bus- 
iness and  to  stay  proceedings  under  the  execution,  till  the 


586        ALIENATION  OF  INTERESTS  IN  PROPERTY 

beneficial  interest  of  the  debtor  partner  in  the  goods  seized 
has  been  ascertained.  But  that  if  the  creditor  does  not  so 
elect,  and  no  such  steps  are  taken  by  the  other  partners,  the 
officer  executing  the  writ  must  sell  the  apparent  interest  of 
the  debtor  in  the  chattels  levied  on,  and  upon  such  sale, 
re-deliver  the  same  to  the  other  partners  and  the  purchaser 
who  will  then  be  owners  in  common,  subject  to  a  lien  in 
favor  of  the  other  partners  and  the  joint  creditors,  upon 
the  interest  of  the  debtor  partner  in  the  hands  of  the  pur- 
chaser, for  any  balance  due  upon  final  adjustment  of  the 
partnership  account. 

It  does  not  appear,  from  the  averments  of  the  petition, 
that  the  officer  executing  the  process  took  the  goods  seized 
into  his  exclusive  possession,  and  it  is  perhaps  inferable 
from  the  petition,  that  he  suffered  the  same  to  remain  in  the 
custody  of  the  other  partners  without  receipt  or  security. 
His  doing  so,  however,  was  not  an  abandonment  of  the 
levy  (Gwynne  on  Sheriffs,  212)  ;  and  as  the  petition  avers 
that  the  other  defendant,  Atkison,  who  still  holds  the  goods 
and  by  the  purchase  from  Nash,  claims  the  entire  property 
therein,  was  aware  of  the  levy  at  the  time  it  was  made, 
the  defense  of  a  bona  fide  purchaser  could  not  be  interposed. 

The  judgments  of  the  district  court  and  court  of  com- 
mon pleas  reversed,  the  demurrer  to  the  petition  overruled, 
and  the  cause  remanded  to  the  common  pleas  for  further 
proceedings. 

SuTLiFF,  C.  J.,  and  Gholson,  Brinkerhoff  and 
ScoTT^  JJ.,  concurred. - 


'Coiiif^arc:  Clagctt  v.  Kilbonnic,  i  Black.  346.  ("The  purchaser 
[at  Sheriff's  sale  on  attachment  and  sale  of  partner's  interest  in  firm's 
goods  at  the  suit  of  a  separate  creditor]  takes  the  same  interest  in  the 
property  which  the  judgment  debtor  would  have  upon  a  final  adjust- 
ment of  all  the  accounts  of  the  partnership.  It  is  not  only  an  undivided, 
but  an  unascertained,  interest,  and  the  purchaser  is  substituted  to  the 
rights  and  interests  of  the  judgment  debtor  in  the  property  sold. 
Neither  does  the  sale  transfer  any  part  of  the  joint  property  to  the 
purchaser,  so  as  to  entitle  him  to  take  it  from  the  other  partners;  for 
that  would  be  to  place  him  in  a  better  situation  than  the  partner  (judg- 
ment debtor)  himself.  The  remedy  of  the  purchaser  is  to  go  into  equity 
and  call  for  an  account,  and  thus  entitle  himself  to  the  interest  of  the 
judgment  debtor,  if  any,  after  the  settlement  of  the  partnership 
liabilities.") 


MENAGH  V.  WHITWELL  587 


MENAGH  V.  WHITWELL. 
In  the  Court  of  Appeals,  New  York^   1873. 

52  Xevj  York  Reports,  146. 

Appeal  from  a  judgment  of  the  General  Term  of  the 
Supreme  Court  in  the  fourth  judicial  department,  affirm- 
ing a  judgment  in  favor  of  the  plaintiff  entered  upon  the 
report  of  a  referee.  This  action  was  for  taking  and  con- 
verting personal  property. 

The  property  consisted  of  machinery,  utensils,  lumber 
and  other  chattels  formerly  belonging  to  the  firm  of  J.'C. 
Smith  &  Co.,  and  appertaining  to  a  yeast  factory  operated 
by  that  firm. 

From  the  17th  of  August  to  the  22nd  day  of  Decem- 
ber, 1866,  the  firm  consisted  of  John  C.  Smith,  Hollister 
E.  Goodwin,  John  Wride,  Marietta  Huntington  and  Wil- 
liam B.  Rubert,  each  being  interested  to  the  extent  of  one- 
fifth. 

The  firm  as  thus  constituted  contracted  debts  to  the 
Geneva  National  Bank,  upon  which  judgments  were  after- 
ward recovered  against  the  above  named  parties,  viz.,  one 
judgment  for  $1,403.83,  and  one  for  $237.53,  both  recov- 
ered IMay  24,  1867.  The  larger  judgment  embraced  claims 
to  the  amount  of  $330,  which  accrued  after  the  withdrawal 
of  John  Wride  from  the  firm. 

Executions  were  issued  on  these  judgments  on  the 
25th  of  May,  1867,  ^"<J  placed  in  the  hands  of  the  defend- 
ant. Ringer,  who  was  deputy  sheriff  of  Ontario  county,  and 
by  virtue  of  those  executions  he  levied  upon  the  property 
on  the  19th  of  July,  1867,  and  sold  it  on  the  29th  of  July, 
1867.  The  defendant,  Whitwell,  was  sheriff",  and  this 
action  was  brought  against  him  and  his  deputy  for  that  levy 
and  sale.  The  plaintiff  recovered  four-fifths  of  the  value 
of  the  property. 


588        ALIENATION  OF  INTERESTS  IN  PROPERTY 

The  plaintiff  makes  title  to  this  four-fifths  as  follows: 

On  the  22ci  of  December,  1866,  John  Wride  assigned 
all  his  interest  in  the  property  and  business  of  the  firm  to 
John  C.  Smith,  who  agreed  to  pay  the  firm  debts,  and  on 
the  4th  of  February,  1867,  Marietta  Huntington  assigned 
all  her  interest  in  the  property  of  the  firm  to  said  John  C. 
Smith,  who  assumed  her  place  in  the  firm.  After  these 
transfers  the  same  business  was  carried  on  by  the  remaining 
partners  under  the  same  firm  name.  The  referee  finds  that 
both  of  these  transfers  were  made  with  the  consent  of  all 
the  other  members  of  the  firm  and  in  good  faith,  without 
intent  to  defraud  the  creditors  of  the  firm. 

On  the  28th  of  February,  1867,  ^^^  fii'"!'  then  consist- 
ing of  John  C.  Smith,  William  B.  Rubert  and  Hollister  E. 
Goodwin,  and  Smith's  interest  being  then  the  three-fifths, 
he  gave  to  the  plaintiff  a  chattel  mortgage  upon  his 
undivided  three-fifths  interest  in  the  yeast  factory,  property, 
accounts  and  other  choses  in  action  of  the  firm,  to  secure 
his  individual  debt  to  the  plaintiff  of  $2,400,  payable  in 
installments  in  two,  five  and  seven  months,  with  power  to 
take  possession  and  sell  in  case  of  default,  or  whenever  she 
should  deem  herself  unsafe,  before  default.  The  referee 
finds  that  this  amount  was  justly  due  to  the  plaintiff  for 
money  loaned  by  her  to  Smith,  which  he  had  used  for  the 
firm  and  for  which  it  was  indebted  to  him ;  and  that  the 
mortgage  was  given  in  good  faith,  with  the  consent  of  all 
the  persons  composing  the  firm,  and  without  intent  to  de- 
fraud creditors.  There  is  no  express  finding  in  respect  to 
the  solvency  of  the  firm  at  the  time  of  the  giving  of  this 
mortgage. 

On  the  2d  of  February,  1867,  William  B.  Rubert  had 
given  a  like  chattel  mortgage  on  his  one-fifth  interest  to 
Samuel  E.  Rubert,  to  secure  an  individual  debt  of  $500, 
payable  in  five  days.  The  referee  finds  that  this  was  a  just 
debt  for  money  loaned,  and  that  the  mortgage  was  executed 
in  good  faith  to  secure  the  debt,  and  without  any  fraud- 


MENAGH  r.  WHITWELL  589 

iilent   intent.      It   does   not   appear   that   any   of   the   other 
partners  consented  to  this  mortgage. 

On  the  loth  of  May,  1867,  the  plaintiff  and  Samuel- E. 
Rubert  took  possession  of  the  property  mentioned  in  their 
respective  mortgages,  and,  after  advertisement,  it  was  sold 
on  the  1 8th  of  May,  1867,  the  three-fifths  interest  of  John 
C.  Smith  being  purchased  by  the  plaintiff  for  $1,000  and 
the  one-fifth  interest  of  William  B.  Rubert  being  bought 
in  by  Samuel  E.  Rubert  for  an  amount  less  than  his  mort- 
gage- 
On  the  same  day  John  C.  Smith  sold  and  delivered  to 
the  plaintiff'  all  his  interest  in  a  quantity  of  lumber,  boxes 
and  other  material  then  on  the  premises,  and  belonging  to 
the  firm,  for  $200,  which  was  applied  in  part  payment  of 
the  plaintiff's  mortgage.  The  referee  finds  that  this  sale  was 
in  good  faith  and  without  any  fraudulent  intent.  This 
lumber,  etc.,  was  levied  upon  and  sold  by  the  defendants 
and  is  embraced  in  the  plaintiff's  recovery. 

On  the  same  day  on  which  the  plaintiff  and  Samuel 
E.  Rubert  took  possession  under  their  mortgages,  viz.,  the 
loth  of  Alay,  1867,  Hollister  E.  Goodwin,  the  only  remain- 
ing member  of  the  firm,  transferred  his  undivided  one-fifth 
interest  in  the  property  and  business  of  the  firm  to  Mary 
B.  Goodwin,  who  still  owns  the  same,  but  never  became 
a  member  of  the  firm.  The  referee  has  not  found  that  there 
was  any  consideration  for  this  transfer,  or  what  was  its 
object,  or  that  it  was  made  in  good  faith. 

The  only  findings  in  respect  to  the  solvency  of  the 
firm  at  the  times  of  these  several  transactions  are  that,  on 
the  22(1  of  December,  1866,  when  John  Wride  withdrew 
from  the  firm,  transferring  his  interest  to  John  C.  Smith, 
the  firm  was  somewhat  embarrassed,  1)ut  was  not  known 
or  believed  to  be  insolvent  by  either  Wride  or  Smith ;  and 
that,  on  the  4th  of  February,  1867,  when  Marietta  Hunting- 
ton transferred  her  interest,  the  financial  affairs  of  the  firm 
were  about  the  same  as  they  were  on  the  22d  of  December, 
1866.     That  the  firm  was  largely  indebted  and  somewhat 


590        ALIENATION  OF  INTERESTS  IN  PROPERTY 

embarrassed.  That  the  value  of  its  property  and  assets  de- 
pended in  part  upon  the  continuance  of  its  business,  and,  in 
case  such  business  were  continued  and  properly  managed, 
the  property  and  assets  of  the  firm  were  more  than  suf- 
ficient to  pay  its  debts. 

The  referee  further  finds  that,  at  the  time  of  the  seizure 
and  levy  by  the  defendants,  the  property  was  in  the  possess- 
sion  of  the  plaintiff  and  Samuel  E.  Rubert,  and  was  of  the 
value  of  $2,150.  That  the  plaintiff  was  the  owner  of  an 
undivided  three-fifths  and  Samuel  E.  Rubert  of  one  undi- 
vided fifth  part  thereof,  and  that  Mary  B.  Goodwin  was 
the  ow^ner  of  the  other  undivided  fifth  part  thereof ;  and 
that,  on  the  15th  of  August,  1867,  and  before  the  com- 
mencement of  this  action,  the  said  Samuel  duly  assigned  to 
the  plaintiff  all  his  rights  to  the  property  and  cause  of 
action  against  the  defendants  for  the  taking  possession 
thereof. 

As  conclusions  of  law,  he  finds  that,  at  the  time  of  the 
levy,  neither  of  the  defendants  in  the  executions  had  any 
leviable  interest  in  the  property,  but  that  it  belonged,  four- 
fifths  to  the  plaintiff,  and  one-fifth  to  Mary  B.  Goodwin. 
That  the  bank  had  no  lien  thereon,  and  that  the  plaintiff 
was  entitled  to  recover  four-fifths  of  the  value,  amounting 
to  $1,720,  with  interest  from  the  time  of  the  conversion.^ 

Rapallo,  J. :  The  mortgages  executed  by  John  C. 
Smith  and  William  B.  Rubert  appear  to  have  been  regarded 
by  the  learned  referee  as  transferring  an  undivided  four- 
fifths  of  the  corpus  of  the  partnership  property  therein 
described.  He  has  found,  as  to  the  mortgage  from  Smith, 
that  it  was  executed  and  delivered  with  the  assent  of  the 
other  memljers  of  the  firm.  This  mortgage,  if  such  be  its 
true  construction,  having  been  given  to  secure  the  individual 
debt  of  the  partner,  even  if  effectual  as  to  the  firm,  by 
reason  of  the  concurrence  of  all  the  partners  giving  it, 
would  be   a    fraudulent   misapplication   of   the   partnership 


The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


MEXAGH  r.  WHITWELL  591 

property,  and  void,  as  to  the  creditors  of  the  firm,  under 
the  principle  of  the  cases  of  Ransom  v.  Van  Dcventcr  (41 
Barb.,  307),  and  JVilson  v.  Robertson  (21  N.  Y.,  587), 
unless  the  firm  were  solvent  at  the  time  the  mortgage  was 
given,  and  sufficient  property  would  remain,  over  and  above 
that  devoted  by  that  instrument  to  the  payment  of  the  indi- 
vidual debt,  to  pay  the  debts  of  the  firm.  The  Supreme 
Court  have  considered  that  the  findings  of  the  referee  fail 
to  disclose  any  insolvency,  but,  on  the  contrary,  establish 
the  solvency  of  the  firm  at  the  time  the  mortgages  were 
given.  We  cannot  concur  in  this  view  of  the  effect  of  the 
findings,  but  think  that  the  facts  found  show  that  the  firm 
was  insolvent  when  the  mortgages  were  given,  and  if  there 
were  any  doubt  upon  that  point,  they  clearly  establish  that 
the  diversion  of  four-fifths  of  its  properties  to  the  individ- 
ual debts  of  two  of  the  partners  would  make  it  insolvent. 

According  to  these  findings,  the  firm  was,  in  February, 
1867,  and  had  been  from  December,  1866,  largely  indebted 
and  embarrassed,  and  the  value  of  its  property,  and  its 
consequent  ability  to  pay  its  debts,  depended,  in  part,  upon 
the  continuance  and  proper  management  of  its  business. 
The  mortgages  were  given  on  the  2d  and  28th  of  February, 
1867.  If  they  were  intended  to  be  liens  upon  the  corpus  of 
the  property,  as  they  have  been  treated  by  the  referee,  and 
not  merely  liens  upon  the  surplus  which  should  belong 
to  the  partners  respectively  after  payment  of  the  firm  debts, 
it  is  evident,  from  the  facts  stated  as  existing  at  the  time, 
as  well  as  from  the  result,  that  their  enforcement  would 
prevent  the  firm  creditors  from  collecting  their  demands 
out  of  the  firm  property,  and  that,  under  the  principle  of 
the  cases  cited,  they  were  fraudulent  and  void  as  to  such 
creditors.  If  so,  the  mortgagees,  by  purchasing  at  the  sale 
under  the  mortgages,  acquired  no  valid  title  as  against 
such  creditors,  and  the  plaintiff  was  consequently  not  en- 
titled to  recover. 

Assuming,  however,  that  the  mortgages  were  intended 
to  pass  merely  the  individual  interests  of  the  mortgaging 


592        ALIENATION  OF  INTERESTS  IN   PROPERTY 

partners  in  the  common  stock,  and  for  that  reason  were  not 
fraudulent  as  to  tlie  firm  crecHtors,  then  it  becomes  necessary 
to  consider  their  legal  eifect  upon  the  rights  of  creditors  of 
the  firm.  It  is  clear  that  the  remaining  partner  was  entitled 
to  the  control  of  the  firm  property  so  long  as  he  retained 
his  interest,  and  to  apply  it  to  the  firm  debts  ,and  that  the 
mortgagees  acquired  only  a  right  to  the  surplus,  if  any, 
which  would  be  found  to  belong  to  the  mortgagors  on  the 
settlement  of  the  accounts. 

And  so  long  as  any  of  the  partners  had  this  dominion 
over  the  firm  property,  it  can  hardly  be  questioned  that  it 
was  subject  to  levy  on  execution  at  the  suit  of  a  firm  cred- 
itor. (Lot'cjoy  V.  Bowers,  ii  N.  H.,  404;  Coovcr's  Appeal, 
29  Penn.  St.  R.,  9;  Pierce  v.  Jackson,  6  Mass.,  243.) 

But  the  point  upon  which  the  judgment  was  sustained 
in  the  Supreme  Court,  at  General  Term,  was,  tliat  after 
the  execution  of  the  mortgages  H.  E.  Goodwin,  the  only 
remaining  partner,  made  a  separate  transfer,  to  a  third 
party,  of  his  individual  interest  in  the  partnership  proper- 
ties, and,  on  this  ground,  it  was  held  that  when  the  execu- 
tion was  levied  none  of  the  defendants  in  the  execution  had 
any  leviable  interest  in  the  property  levied  upon ;  and  it  was 
further  held  that  the  plaintiff,  who  had  purchased  the  inter- 
est of  S.  E.  Rubert,  under  his  mortgage,  was  entitled,  by 
virtue  of  the  two  mortgages  and  of  the  purchase  at  the 
sale  under  them,  to  recover  the  value  of  four-fifths  of  the 
corpus  of  the  partnership  property  levied  upon  by  the 
defendants,  without  regard  to  the  partnership  debts. 

This  position  is  not  without  authority  in  its  support. 
It  is  founded  upon  the  theory  that  the  separate  transfers 
of  the  individual  interests  of  all  the  partners  divested  the 
title  of  the  firm,  that  firm  creditors  have  no  lien  upon  the 
partnership  effects  and  no  direct  right  to  compel  their 
application  to  firm  debts  in  preference  to  individual  deists. 
That  the  right  to  compel  this  application  is  an  equity  vested 
in  the  partners  themselves,  and  exists  only  as  between  each 
other.     That  so  long  as  this  equity  exists  in  any  of  the 


jd 


MENAGH  V.  WHITWELL  593 

partners,  the  creditors  have  an  equity  to  compel  its  enforce- 
ment between  the  partners,  and  may,  by  this  means,  obtain 
the  appHcation  of  the  partnership  properties  to  their  xle- 
mands,  in  preference  to  the  inchvidual  debts  or  separate  dis- 
positions of  any  of  the  partners;  in  other  words,  "that  the 
equities  of  the  creditors  can  be  only  worked  out  through 
the  equities  of  the  partners."  From  these  premises,  the 
conclusions  have  been  drawn  that  if  such  equities  are  waived 
or  released  by  the  partners  themselves  the  crecJitors  lose 
them,  and  that  a  transfer  of  the  individual  interest  of  a 
partner  in  the  firm  property  to  a  third  person  extinguishes 
the  equity  of  the  partner,  and  consequently  that  of  the 
creditors,  which  is  dependent  upon  it.  This  doctrine  has 
been  carried  to  the  extent  of  holding  that  if  the  individual 
interests  of  each  of  the  members  of  a  firm  are  successively 
sold  under  executions  against  such  members  respectively 
for  their  individual  debts,  the  j)urchasers  acquire  the  corpus 
of  the  property,  free  from  the  copartnership  debts,  and  the 
equities  of  the  partners  and  partnership  creditors  are  ex- 
tinguished. {Coovcr's  Appeal,  29  Penn.  St.  R.,  p.  9.) 

The  injustice  and  it  may  be  said,  the  absurdities,  which 
result  from  such  a  view,  lead  to  an  inquiry  into  its  cor- 
rectness. A  firm  may  be  perfectly  solvent  though  the  mem- 
bers are  individually  insolvent,  yet  in  such  a  case  the  doc- 
trine that  the  property  of  the  firm  is  divested,  and  the 
equities  of  the  partners  and  partnership  creditors  are  ex- 
tinguished, by  separate  transfers  of  the  individual  interests 
of  all  partners,  might  result  not  only  in  an  appropriation 
of  all  properties  of  the  firm  to  the  payment  of  the  individual 
debts,  to  the  entire  exclusion  of  the  firm  creditors,  but  to  a 
most  unjustifiable  sacrifice  and  waste  of  such  properties. 
For  instance,  suppose  a  firm  to  consist  of  three  members, 
each  having  an  equal  interest,  and  to  be  possessed  of  assets 
to  the  amount  of  $300,000.  and  to  owe  debts  to  half  of 
that  amount,  the  interest  of  each  partner,  supposing  their 
accounts  between  themselves  to  be  even,  is  $50,000.  The 
members  of  the  firm  are  individuallv  indebted.    One  of  them 


594        ALIENATION  OF  INTERESTS  IN  PROPERTY 

sells  his  share,  and  receives  for  it  $50,000,  which  is  its 
actual  value ;  the  share  of  another  of  the  partners  is  sold 
out  under  execution,  and  hrings  its  full  value,  $50,000.  Thus 
far  one  partner  remains,  and  he  has  an  equity  to  have  the 
firm  debts  paid,  and  those  who  have  sold  out  are  protected 
against  those  debts.  The  purchasers  of  the  separate  inter- 
ests are  entitled  to  the  surplus  only ;  the  joint  creditors  still 
have  their  recourse  against  the  partnership  property  and 
the  right  to  levy  on  such  of  it  as  is  subject  to  sale  on  execu- 
tion ;  but  before  any  levy,  the  remaining  partner  sells  out  his 
individual  interest,  or  it  is  sold  out  on  execution.  Accord- 
ing to  the  doctrine  applied  in  the  present  case,  and  main- 
tained in  the  case  of  Coovcrs  Appeal  (supra),  the  firm 
property  is,  by  this  last  sale,  relieved  from  the  partnership 
debts,  the  two  shares  first  sold  are  at  once  changed  from 
interests  in  the  surplus  to  shares  in  the  corpus  of  the  proi)- 
erty  free  from  the  debts,  their  value  is  doubled,  and  the 
fund  wdiich  should  have  gone  to  pay  the  joint  debts  is,  with- 
out any  consideration,  appropriated  by  the  transferrees  of 
the  individual  interests  of  the  partners. 

Such  is,  in  substance,  the  operation  performed  in  the 
present  case.  Assuming  that  the  mortgages  are  intended  to 
convey  only  the  separate  interests  of  the  mortgagors  (which, 
as  has  been  shown,  is  the  only  theory  upon  which  the}' 
can  escape  being  regarded  as  fraudulent),  the  mortgaged 
property  was,  at  the  time  the  mortgages  were  given,  liable 
to  be  taken  for  the  partnership  debts.  The  mortgages  were 
but  a  slender  security,  and  their  value  dependent  upon  the 
firm  debts  being  paid.  This  state  of  afifairs  continued  so 
long  as  Hollister  E.  Goodwin  retained  his  one-fifth  interest 
in  the  firm.  The  firm  property  was  legally  under  his 
dominion  for  the  payment  of  firm  debts,  and  the  firm  cred- 
itors, if  they  then  had  their  execution,  could  have  rightfully 
levied  upon  it,  or  availed  themselves  of  Goodwin's  equity  as 
to  any  property  which  must  be  reached  in  that  form.  But 
on  the  tenth  of  May,  1867,  Hollister  E.  Goodwin  made  a 
transfer  of  his  interest  in  the  property  of  the  firm  to  one 


MENAGH  V.  WHITVVELL  595 

Mary  B.  Goodwin,  and  on  the  same  day  the  plaintiff  and 
Samuel  E.  Rubert  took  possession  under  their  mortgages. 
The  referee  has  not  found  what  was  the  consideration  x»r 
purpose  of  this  assignment  from  Hollister  E.  to  Mary  B. 
Goodwin,  nor  has  he  expressly  found  that  it  was  made  in 
good  faith.  But  the  eft'ect  claimed  for  it  is  that  Hollister 
E.  Goodwin  being  the  only  remaining  partner,  the  transfer 
of  his  interest  divested  him  of  his  dominion  over  the  part- 
nership property,  and  of  his  equity  to  require  the  application 
of  the  partnership  property  to  the  payment  of  its  debts,  and 
that  as  the  partnership  creditors  could  only  reach  the  prop- 
erty through  him,  he,  by  this  transfer  or  surrender  of  his 
rights,  had  cut  oft'  their  access  to  it,  and  thrown  it  into  the 
hands  of  the  transferrees  of  the  individual  partners,  unin- 
cumbered by  firm  debts. 

Waiving  any  question  as  to  the  bona  fides  of  this  trans- 
action, the  referee  not  having  found  it  fraudulent,  and 
treating  the  sale  of  Goodwin's  interest  as  if  it  had  been 
made  under  an  execution  against  him,  we  come  back  to  the 
question  whether  the  consequences  claimed  do  legally  follow 
from  separate  sales  of  the  individual  interests  of  the  several 
partners. 

It  would  be  a  sui)erfluous  labor  to  trace  the  history  of 
the  changes  which  have,  from  time  to  time,  taken  place  in 
the  views  of  the  courts  respecting  the  nature  of  the  inter- 
ests of  individual  partners  in  the  common  stock  of  a  firm, 
and  the  respective  rights  of  separate  and  joint  creditors; 
but  it  is  sufiicient  to  observe  that  they  have  resulted  in  a 
general  recognition  of  the  doctrine,  that  as  between  a  firm 
and  its  creditors  the  property  is  vested  in  the  firm,  and  that 
no  individual  partner  has  an  exclusive  right  to  any  part 
of  the  joint  stock  until  the  firm  debts  are  paid  and  a  bal- 
ance of  account  is  struck  between  him  and  his  copartners, 
and  the  amount  of  his  interest  accurately  ascertained. 

The  corpus  of  the  effects  is  joint  property,  and  neither 
partner  separately  has  anything  in  that  corpus;  but  the  inter- 
est of  each   is  onlv  his  share  of  what   remains  after  the 


596        ALIENATION  OF  INTERESTS  IN  PROPERTY 

partnershi])  del)ts  are  paid  and  accounts  are  taken  {West 
V.  Skip,  I  Ves.  239;  Fox  v.  Hanbury,  Cowp.,  445;  Taylor 
V.  Fields,  4  Ves.,  396;  15  Ves.  559,  note;  Pierce  v.  Jackson, 
6  Mass.,  243;  Doner  v.  Staujfer,  i  Penn.  R.  [Penrose  & 
Watts,  see  p.  164],  198;  2  K  Com.,  nth  ed.,  p.  78,  note; 
Collyer  on  Part.,  3d  Am.  ed.  [Perkins],  notes  to  Sec.  822, 
pp.  704  to  710;  Story  on  Part.,  notes  to  Sees.  261,  262,  263; 
Crane  v.  French,  I  Wend.,  311;  Witter  v.  Richards,  10 
Conn.,  37). 

Partnership  effects  cannot  be  taken  by  attachment  or 
sold  on  execution  to  satisfy  a  creditor  of  one  of  the  part- 
ners, except  to  the  extent  of  the  interest  of  such  separate 
partner  in  the  effects,  subject  to  the  payment  of  the  firm 
debts  and  settlement  of  all  accounts.  (3  Kent  Com.,  76,  nth 
ed.) 

Purchasers  of  the  share  of  an  individual  partner  can 
only  take  his  interest.  That  interest,  and  not  a  share  of  the 
partnership  effects,  is  sold,  and  it  consists  merely  of  the 
share  of  the  surplus  which  shall  remain  after  the  payment 
of  the  debts  and  settlement  of  the  accounts  of  the  firm.  (3 
K.  C,  78,  note  b,  nth  ed. ) 

No  more  property  can  be  carried  out  of  the  firm  by 
the  assignee  of  one  partner  than  the  partner  himself  could 
extract  after  all  the  accounts  are  taken,  (i  Ves.,  241.,  Am. 
ed.,  note;  15  Ves.,  557.) 

No  person  deriving  under  a  partner  can  be  in  a  better 
condition   than    the    partner    himself.      {Fox   v.    Hanbury, 

Cowp.,  445.) 

A  partner  has  no  right,  by  an  assignment  of  his  inter- 
est, to  take  from  the  creditors  or  other  partners  the  right 
to  have  their  claims  against  the  partnership  satisfied  out  of 
its  property.  A  mortgage  made  by  one  partner,  of  his 
undivided  interest,  cannot  avail  against  the  creditors  of 
the  partnership  who  attach  the  partnership  property.  {Love- 
joy  V.  Bowers,  11  New  Hamp.,  404.) 

These  principles  have  been  enunciated  in  a  great  num- 
ber of  cases  where  some  one  at  least  of  the  partners  re- 


MEXAGH  r.  WHITWELL  597 

tained  his  equity  to  have  the  firm  debts  paid,  and  the  rights 
of  the  creditors  to  assets  or  proceeds,  which  have  come 
under  the  control  of  a  court  of  equity,  have  been  wortced 
out  through  the  equity  of  that  partner.  But  I  find  no  case 
in  which  the  consequences  of  transfers  of  the  separate  in- 
terests of  all  the  partners  to  outside  parties  has  been  con- 
sidered, except  the  case  of  Doner  v.  Staiijfcr  ( i  Penn. 
[Penrose  &  Watts],  198),  and  Coovcr's  Appeal  (29  Penn. 
St.  R.,  9),  before  referred  to.  In  neither  of  these  cases 
is  the  point  adjudicated,  for  in  both  cases  the  joint  creditors 
intervened  before  the  sale  of  the  interest  of  the  last  remain- 
ing partner,  and  their  right  to  priority  was  sustained ; 
though  the  opinion  of  the  court  was  expressed  as  to  what 
the  result  would  have  been  if  all  the  individual  interests 
had  been  first  sold. 

There  is  another  class  of  cases  in  which  the  partner- 
ship efifects  have  been  held  to  be  liberated  from  liability 
to  be  applied  to  partnership  debts  in  preference  to  the  sep- 
arate debts  of  one  partner ;  that  is  where  a  bona  fide  sale 
has  been  made  by  a  retiring  partner,  in  a  solvent  firm  of 
two  members,  to  his  copartner,  the  latter  assuming  the 
debts.  In  such  a  case  it  is  settled  that  the  property  form- 
erly of  the  partnership  becomes  the  separate  property  of 
the  purchasing  partner,  and  that  the  partnership  creditors 
are  not  entitled  to  any  preference  as  against  his  individual 
creditors, in  case  of  his  subsequent  insolvency.  {Ex  parte 
Riiffin,  6  Ves.,  119:  Dimon  v.  Hazard,  32  N.  Y.,  65. )  But 
in  those  cases  the  joint  property  was  converted  into  sep- 
arate property  by  the  joint  act  of  all  the  members  of  the 
firm.  'They  had  power  to  dispose  of  the  corpus  of  the 
joint  property,  and  the  exercise  of  that  power,  when  free 
from  fraud,  divested  the  title  of  the  firm  as  effectually  as 
if  they  had  united  in  a  sale  to  a  stranger.  It  remained 
subject  to  execution  for  firm  debts  so  long  as  it  continued 
in  the  hands  of  the  purchasing  partner.  It  is  conceded 
that  the  creditors  have  no  lien  which  would  afifect  the  title 
of  a  purchaser  from  the  firm.     But  the  question  now  is, 


598        ALIENATION  OF  INTERESTS  IN  PROPERTY 

what  is  the  effect  upon  the  title  of  the  firm,  as  between 
it  and  its  creditors,  of  transfers  by  the  partners  severally 
of  their  respective  interests  to  third  persons?  Where  the 
property  remains  in  specie,  and  no  act  has  been  done  by 
the  firm  to  divest  its  title,  but  the  partners  have  made 
separate  transfers  of  their  respective  individual  interests 
to  different  persons,  is  it  still  to  be .  regarded,  as  to  firm 
creditors,  as  firm  property,  or  has  it  become  the  absolute 
property  of  the  several  transferrees  of  the  interests  of  the 
individual  partners? 

It  has  been  shown  that  no  share  in  the  corpus  of  the 
property  passed  by  either  of  these  transfers  separately,  but 
merely  an  interest  in  the  surplus,  and  which  should  be 
ascertained  on  an  accounting"  after  payment  of  the  firm 
debts.  But  it  is  claimed  that,  when  all  the  partners  have 
assigned,  their  interest  in  the  property  is  divested,  and 
their  equity  is  destroyed,  and,  therefore,  the  property  is 
released  from  the  debts,  and  what  was,  at  the  time  of 
the  assignment,  a  share  of  a  contingent  surplus,  has  been 
converted  into  a  share  of  the  corpus  of  the  property.  Is  this 
position  sound?  When  a  partner  sells  his  interests  in  a 
firm  to  a  person  other  than  his  copartner,  or  it  is  sold  on 
execution  against  him,  docs  he  thereby  lose  all  c(|uity  to 
have  the  firm  debts  paid  out  of  the  assets? 

When  he  sells  to  his  copartner  he  relies  upon  his 
assumption  of  the  partnership  debts,  and  unless,  he  stipu- 
lates for  an  application  of  the  assets  to  that  purpose,  he 
parts  with  all  lien  upon  them.  But  when  he  sells  to  a 
stranrer  not  liable  for  the  debts,  or  his  interest  is  sold  on 
execution,  is  not  the  right  to  have  the  debts  paid  oUt  of  the 
property  a  right  of  indemnity  personal  to  himself,  and 
which  does  not  pass  by  the  sale?  Could  it  be  tolerated 
that  the  interest  of  a  partner  should  be  sold  imder  execu- 
tion against  him,  on  which  sale  only  the  value  of  his  inter- 
est in  the  surplus  could  be  realized,  and  that  the  purchaser 
should  be  allowed  to  take  the  corpus  of  the  property  and 
leave  him  liable  for  the  debts?     If  the  legal  effect  of  the 


MENAGH  V.  WHITWELL  599 

transfer  were  set  forth  in  the  instrument,  it  would  be  seen 
that  all  the  purchaser  acquired  was  a  right  to  an  account, 
and  to  the  partner's  share  in  the  surplus,  after  paymefit 
of  the  debts  when  ascertained,  and  that  he  had  no  right 
to  that  part  of  the  property  which  was  required  for  the 
payment  of  debts ;  that  the  sale  was  subject  to  the  debts. 
(3  K.  Com.,  76-78.)  The  partner  whose  share  was  sold 
would  manifestly  have  an  interest  in  the  protection  and 
appropriation  of  that  part  of  the  property  in  discharge  of 
his  own  liability  to  the  firm  creditors. 

I  do  not  see  how  this  right  can  be  affected  by  the  ques- 
tion whether  the  separate  interests  of  all  or  only  one  of 
the  partners  is  thus  sold.  Each  of  the  purchasers  would 
acquire  an  interest  merely  in  the  surplus,  and  each  partner 
whose  interest  was  sold  would  have  the  right  to  indemnity 
against  the  firm  debts  by  the  application  to  such  debts  of 
so  much  of  the  property  as  might  be  necessaiy  for  the 
purpose.  These  debts  must  have  been  taken  into  consider- 
ation in  fixing  the  price  of  the  interest  sold,  and  conse- 
quently allowed  to  the  purchaser,  and  the  partnership  assets 
are  the  primary  fund  for  their  payment.  The  case  differs 
materially  from  a  sale  by  a  retiring  copartner  to  his  co- 
partner, who  is  personally  liable  for  the  debts  directly 
to  the  creditors ;  but  even  such  a  sale  is  valid  only  when 
there  is  no  insolvency  at  the  time.  To  sell  to  an  insolvent 
partner  would  be  a  clear  fraud.  How  much  more  clearly 
apparent  would  be  the  injury  to  creditors  by  a  sale  to  a 
person  not  liable  for  the  debts,  if  such  sale  had  the  effect 
to  relieve  the  property  from  them. 

It  can  hardly  be  necessary,  where  the  firm  property 
remains  in  specie  and  is  tangible  and  capable  of  being  lev- 
ied upon,  to  resort  to  the  equities  of  the  partners  in  case 
there  has  been  no  transfer  by  the  firm,  and  the  only  ad- 
verse claimants  are  assignees  of  the  individual  interests  of 
the  several  partners  for  their  separate  debts.  The  right  of 
the  firm  creditor  to  levy  on  property  thus  situated  can  be 
sustained  on  two  grounds.      If  the  effect  of  any  of  these 


600        ALIENATION  OF  INTERESTS  IN  PROPERTY 

transfers  is  to  divest  the  title  of  the  firm,  then,  if  effected 
by  the  acts  of  the  partner,  they  are  clearly  fraudulent  and 
void  as  to  firm  creditors,  as  is  shown  in  the  cases  of  Ran- 
som V.  Van  Dcvcnter  (41  Barb.,  307)  and  Wilson  v.  Rob- 
ertson (21  N.  Y.,  587).  An  appropriation  to  the  individ- 
ual debt  of  one  partner  of  any  part  of  the  firm  property, 
even  witli  the  assent  of  his  copartners,  is  illegal  and  void, 
provided  the  firm  is  not  left  with  sufficient  to  pay  its  debts. 
How  absurd  it  would  be  to  hold  that  all  of  the  partners, 
by  making  separate  assignments  of  their  respective  shares 
in  the  firm  property  to  their  individual  creditors,  could  ef- 
fectually divest  the  firm  of  all  its  property  and  apply  it  to 
their  individual  debts,  leaving  nothing  for  the  partnership 
creditors.  But  the  simple  solution  of  the  question  is  to 
hold  that  the  title  of  the  firm,  as  between  it  and  its  credi- 
tors, to  the  corpus  of  the  property,  or  at  least  to  so  much  of 
it  as  is  necessary  for  the  debts,  is  not  divested  by  these 
separate  transfers  to  strangers. 

As  is  stated  by  Prof.  Parsons,  in  his  work  on  Partner- 
ship (chap.  10,  sec.  i,  pages  356  to  362,  2d  ed. ),  a 
partnership,  though  neither  a  tenancy  in  common  nor  a 
corporation,  has  some  of  the  attributes  of  both.  The  well 
established  rule  which  excludes  creditors  of  the  several  part- 
ners from  the  partnership  property  until  that  has  paid  the 
debts  of  the  partnership,  is  derived  from  the  acknowledg- 
ment that  a  partnership  is  a  body  by  itself.  In  its  relation 
to  its  creditors  it  is  placed  upon  the  basis  of  having  its  own 
creditors  and  possessing  its  own  property,  which  it  applies 
to  the  payment  of  its  debts,  and  after  this  work  is  done, 
there  is  a  resolutiou  of  the  body  into  its  elements. 

Until  some  act  is  done  by  the  firm  to  transfer  the  joint 
interest,  no  separate  act  of  either  or  all  of  the  partners,  or 
proceedings  against  them  individually  with  reference  to 
their  individual  interests,  should  be  held  to  affect  the  title 
of  the  firm  so  as  to  preclude  a  creditor  of  the  firm,  having 
a  judgment  and  execution,  from  levying  upon  the  joint 
property.     To  hold  that  separate  transfers  of  their  individ- 


MENAGH  V.  WHITWELL  601 

iial  shares  by  the  several  partners  can  convey  a  good  title 
to  the  whole  property  free  from  the  joint  debts,  would  be 
to  return  to  the  doctrine,  long  since  exploded,  that  partners 
hold  by  moieties  as  tenants  in  common.  In  the  present  ad- 
vanced stage  of  the  law  upon  this  subject,  no  established 
rule  is  violated  by  iiolding  that  the  title  of  the  firm,  as  be- 
tween it  and  its  creditors,  cannot  be  divested  by  the  acts  of 
the  partners  severally,  not  in  the  business  of  the  firm,  nor 
by  the  separate  creditors  of  members  of  the  firm  (further 
than  such  temporary  interruption  of  the  possession  as  may 
be  necessary  to  enable  the  officers  of  the  law  to  make  an 
effectual  sale  of  the  interest  of  the  debtor  partner).  This 
view  does  not  recognize  any  lien  of  partnership  creditors 
upon  the  firm  property.  The  firm  have  power  to  dispose 
of  it  without  regard  to  the  creditors,  provided  the  disposi- 
tion be  not  fraudulent.  But  the  individual  members  or 
their  creditors  ought  not  to  have  any  such  power,  and  all 
transfers  made  by  them  for  individual  purposes  should  be 
held  inoperative  upon  the  corpus  of  the  property,  so  long  as 
there  are  firm  debts  unpaid  for  which  the  property  is  re- 
quired. As  against  firm  creditors,  no  greater  effect  should 
be  given  to  such  transfers  when  made  by  all  the  partners 
separately,  than  when  made  by  a  portion  of  them,  but  the 
property  should  be  deemed  to  continue  in  the  firm  until  its 
title  has  been  divested  by  some  act  of  the  firm. 

My  conclusion  is  that,  as  between  the  firm  of  J.  C. 
Smith  &  Co.  and  its  creditors,  the  property  levied  upon  by 
the  defendants  remained  the  property  of  the  firm,  and  sub- 
ject to  levy  on  execution  against  it,  notwithstanding  the 
transfers  by  the  several  partners  of  their  respective  individ- 
ual interests. 

I  have  not  adverted  to  the  changes  which  took  place 
in  the  firm  bv  the  retirement  of  John  Wride  and  M.  Hunt- 
ington, and  the  transfer  by  them  of  their  interests  to  J.  C. 
Smith,  intermediate  the  contracting  of  the  debt  to  the  Bank 
of  Geneva  and  the  levy,  the  effect  of  these  changes  being 


602        ALIENATION  OF  INTERESTS  IN  PROPERTY 

fully  considered  in  the  opinion  of  my  learned  associate, 
Allen,  J. 

The  judgment  should  be  reversed,  and  a  new  trial  or- 
dered, with  costs  to  abide  the  event. ^ 

Judgment  reversed. 


^  The  concurring  opinion  of  Allen,  J.,  is  omitted.  All  the  other 
members  of  the  court,  except  Folger  and  Andrews,  JJ.,  not  sitting, 
concurred  in  both  opinions. 


CASE  z'.  BEAUREGARD  603 


CASE  v.  BEAUREGARD. 
In  the  Supreme  Court  of  the  United  States,   1878. 

99  United  States  Rc[>orts,  119. 

Appeal  from  the  Circuit  Court  of  the  United  States 
for  the  District  of  Louisiana. 

This  suit  was  brought  July  10,  1869,  '^Y  Frank  F. 
Case,  receiver  of  the  First  National  Bank  of  New  Orleans, 
against  Gustave  T.  Beauregard,  Thomas  P.  May,  Augus- 
tus C.  Graham,  George  Binder,  Alexander  Bonneval,  Jo- 
seph Hernaudez,  the  New  Orleans  and  Carrollton  Railroad 
Company,  and  the  Fourth  National  Bank  of  New  York,  to 
recover  a  debt  of  $237,000.89,  which  he  claimed  was  due 
from,  and  had  been  contracted  by,  Beauregard,  May,  and 
Graham,  while  they  were  partners,  and  carrying  on  busi- 
ness as  such  ;  and  to  have  certain  transfers  of  partnership 
property  set  aside  and  subjected  to  the  payment  of  the  debt. 

On  the  8th  of  May,  1867,  Graham,  one  of  the  part- 
ners, assigned  all  his  right  and  interest  in  any  property  and 
effects  of  the  partnership,  and  whatever  he  might  be  en- 
titled to  under  the  articles  thereof,  together  with  all  debts 
due  to  him  from  the  partnership  or  any  member  thereof, 
to  the  Fourth  National  Bank  of  the  City  of  New  York. 
By  subsequent  assignments,  made  on  the  14th  and  16th  of 
May,  1869,  May,  the  second  partner,  transferred  all  his 
interest  in  the  partnership  i)r()perty  to  the  United  States, 
and  by  the  same  instruments  transferred  to  the  United 
States,  by  virtue  of  a  power  of  attorney  which  he  held, 
the  interest  of  Graham.  On  the  21st  of  August,  1867,  the 
United  States  sold  and  transferred  their  interest  obtained 
from  May  and  Graham  in  all  the  partnership  property,  in- 
cluding real  estate,  to  Alexander  Bonneval,  Joseph  Her- 
nandez, and  George  Binder.  On  the  15th  of  October  next 
following,  an  act  of  fusion  was  executed  between  the  New 
Orleans    and    Carrollton    Railroad    Company,    Beauregard, 


604        ALIENATION  OF  INTERESTS   IN   TROPERTY 

Bonneval,  Hernandez,  and  Binder,  by  which  the  rights  of 
all  the  parties  became  vested  in  the  railroad  company,  sub- 
ject to  the  debts  and  liabilities  of  the  company,  whether 
due  or  claimed  from  the  lessee  or  the  stockholders. 

The  complainant  charges  that  the  First  National  Bank, 
being  the  creditor  of  the  partnership,  had  a  lien  or  privilege 
on  its  effects,  and  was  entitled  to  be  paid  therefrom  to  the 
exclusion  of  the  creditors  of  any  member  of  the  partner- 
ship; that  the  partnership  was  insolvent;  that  none  of  its 
members  was  able  to  pay  his  individual  debts,  or  author- 
ized to  dispose  of  the  partnership  property  for  the  pay- 
ment of  such  debts;  that  the  deed  to  the  United  States,  its 
deed  to  Binder,  Bonneval,  and  Hernandez,  and  the  deed  of 
the  latter  parties  and  Beauregard  to  the  railroad  company, 
are  in  fraud  of  the  rights  of  the  bank  as  a  creditor  of  the 
partnership,  and  that  the  same  should  be  cancelled  and  the 
partnership  property  sold  to  satisfy  the  prior  and  privileged 
claim  of  the  bank.  He  prays  that  Binder,  Bonneval,  Her- 
nandez, and  Beauregard  be  enjoined  from  transferring  or 
incumbering  their  stock  in  the  company,  and  that  the  lat- 
ter be  enjoined  from  recognizing  or  permitting  such  trans- 
fer, and  for  general  relief. 

The  bill  was  dismissed  on  a  final  hearing,  and  the  com- 
plainant appealed  here.^ 

Mr.  Justice  Strong  delivered  the  opinion  of  the  court.^ 

The  object  of  this  bill  is  to  follow  and  subject  to  the 
payment  of  a  partnership  debt  property  which  formerly 
belonged  to  the  partnership,  but  which,  before  the  bill  was 
filed,  had  been  transferred  to  the  defendants.  There  is  lit- 
tle if  any  controversy  respecting  the  facts,  and  little  in  re- 
gard to  the  principles  of  equity  invoked  by  the  complainant. 
The  important  question  is,  whether  those  principles  are 
applicable  to  the  facts  of  the  case. 


'  The  Reporter's  statement  of  the  facts  of  the  case  is  ahbreviated, 
and  his  notes  of  the  argument  of  counsel  for  the  appellant  omitted. 

"Judge  Strong's  statement  of  the  facts  of  the  case  having  been  used 
in  the  statement  just  given  is  omitted  from  the  opinion. 


J 


CASE  V.  BEAUREGARD  605 

No  doubt  the  effects  of  a  partnership  belong  to  it  so 
long  as  it  continues  in  existence,  and  not  to  the  individuals 
who  compose  it.  The  rigiit  of  each  partner  extends  only 
to  a  share  of  what  may  remain  after  payment  of  the  debts 
of  the  hrm  and  the  settlement  of  its  accounts.  Growing 
out  of  this  right,  or  rather  included  in  it,  is  the  right  to 
have  the  partnership  property  applied  to  the  payment  of 
the  partnership  debts  in  preference  to  those  of  any  individ- 
ual partner.  This  is  an  ^cjuity  the  partners  have  as  be- 
tween themselves,  and  in  certain  circumstances  it  inures  to 
the  benefit  of  the  creditors  of  the  firm.  The  latter  are  said 
to  have  a  privilege  of  preference,  sometimes  loosely  de- 
nominated a  lien,  to  have  the  debts  due  to  them  paid  out 
of  the  assets  of  a  firm  in  course  of  liquidation,  to  the  ex- 
clusion of  the  creditors  of  its  several  members.  Their  eq- 
uity, however,  is  a  derivative  one.  It  is  not  held  or  en- 
forceable in  their  own  right.  It  is  practically  a  subroga- 
tion to  the  equity  of  the  individual  partner,  to  be  made  ef- 
fective only  through  him.  Hence,  if  he  is  not  in  a  condi- 
tion to  enforce  it,  the  creditors  of  the  firm  cannot  be.  Rice 
V.  Barnard,  ct  al.,  20  Vt.  479;  Appeal  of  the  York  Comity 
Bank,  32  Pa.  St.  446.  But  so  long  as  the  equity  of  the 
partner  remains  in  him,  so  long  as  he  retains  an  interest  in 
the  firm  assets,  as  a  i)artner,  a  court  of  equity  will  allow 
the  creditors  of  the  firm  to  avail  themselves  of  his  equity, 
and  enforce,  through  it,  the  application  of  those  assets  pri- 
marily to  payment  of  the  debts  due  them,  whenever  the 
property  comes  under  its  administration. 

It  is  indispensable,  however,  to  such  relief,  when  the 
creditors  are,  as  in  the  present  case,  simple  contract  credi- 
tors, that  the  partnership  property  should  be  within  the 
control  of  the  court  and  in  the  course  of  administration, 
brought  there  by  the  bankrui)tcy  of  the  firm,  or  by  an  as- 
signment, or  by  the  creation  ol  a  trust  in  some  mode.  This 
is  because  neither  the  partners  nor  the  joint  creditors  have 
any  specific  lien,  nor  is  there  any  trust  that  can  be  enforced 
until  the  property  has   passed   in  ciistodiain  legis.     Other 


606        ALIENATION  OF  INTERESTS  IN   PROPERTY 

property  can  be  followed  only  after  a  judgment  at  law  has 
been  obtained  and  an  execution  has  proved  fruitless. 

So,  if  before  the  interposition  of  the  court  is  asked  the 
property  has  ceased  to  belong  to  the  partnership,  if  by  a 
bona  fide  transfer  it  has  become  the  several  property  either 
of  one  partner  or  of  a  third  person,  the  equities  of  the  part- 
ners are  extinguished,  and  consequently  the  derivative  equi- 
ties of  the  creditors  are  at  an  end.  It  is,  therefore,  always 
essential  to  any  preferential  right  of  the  creditors  that  there 
shall  be  property  owned  by  the  partnership  when  the  claim 
for  preference  is  sought  to  be  enforced.  Thus,  in  Ex 
partc  Ruffiii  (6  Ves.  119),  where  from  a  partnership  of 
two  persons  one  retired,  assigning  the  partnership  property 
to  the  other,  and  taking  a  bond  for  the  value  and  a  cove- 
nant of  indemnity  against  debts,  it  was  ruled  by  Lord  El- 
don  that  the  joint  creditors  had  no  equity  attaching  upon 
partnership  effects,  even  remaining  in  specie.  And  such 
has  been  the  rule  generally  accepted  ever  since,  with  the 
single  qualification  that  the  assignment  of  the  retiring  i)art- 
ner  is  not  mala  fide.  Kimball  v-  Thompson,  13  Mete. 
(Mass.)  283;  Allen  v.  The  Centre  ]' alley  Company,  et  al.. 
21  Conn.  130;  Ladil  v.  Gri.neold,  9  111.  25;  Smith  v.  Ed- 
wards, 7  Humph.  ( Tenn.  )  106;  Robb  and  Others  v.  Mudge 
and  Another,  14  Gray  (Mass.),  534;  Baker's  Appeal,  21 
Pa.  St.  76;  Sigler  &  Richey  v.  Knox  Comity  Bank,  8  Ohio 
St.  511;  JVilcox  V.  Kellogg,  11   Ohio,  394. 

The  joint  estate  is  converted  into  the  separate  estate 
of  the  assignee  by  force  of  the  contract  of  assignment. 
And  it  makes  no  difiference  whether  the  retiring  j^artner 
sells  to  the  other  partner  or  to  a  third  person,  or  whether 
the  sale  is  made  by  him  or  under  a  judgment  against  him. 
In  either  case  his  equity  is  gone.  These  ])rinciples  are  set- 
tled by  very  abundant  authorities.  It  remains,  therefore, 
only  to  consider  whether,  in  view  of  the  rules  thus  settled 
and  of  the  facts  of  this  case,  the  complainant,  through 
any  one  of  the  partners,  has  a  right  to  follow  the  specific 
property  which  formerly  belonged  to  the  partnership,  and 


CASE  z'.  BEAUREGARD  607 

compel  its  application  to  the  payment  of  the  debt  due  from 
the  firm  to  the  bank  of  which  he  is  the  receiver.  *  *  * 
The  effect  of  these  transfers  [by  the  individual-part- 
ners] and  act  of  fusion  was  very  clearly  to  convert  the 
partnership  property  into  property  held  in  severalty,  or,  at 
least,  to  terminate  the  equity  of  any  partner  to  require  the 
application  thereof  to  the  payment  of  the  joint  debts. 
Hence  if,  as  we  have  seen,  the  equity  of  the  partnership 
creditors  can  be  worked  out  only  through  the  equity  of  the 
partners,  there  was  no  such  equity  of  the  partners,  or  any 
one  of  them,  as  is  now  claimed,  in  1S69,  when  this  bill  was 
filed.  No  one  of  the  partners  could  then  insist  that  the 
property  should  be  applied  first  to  the  satisfaction  of  the 
joint  debts,  for  his  interest  in  the  partnership  and  its  assets 
had  ceased.  Baker's  Appeal,  21  Pa.  St.  823.  That  w^as  a 
case  where  a  firm  had  consisted  of  five  brothers.  Two  of 
them  withdrew,  disposing  of  their  interest  in  the  partner- 
ship estate  and  effects  to  the  other  three,  the  latter  agreeing 
to  pay  the  debts  of  the  firm.  Some  time  after,  one  of  the 
remaining  three  sold  his  interest  in  the  partnership  prop- 
erty to  one  of  the  remaining  two  partners.  The  two  re- 
maining, after  contracting  debts,  made  an  assignment  of 
their  partnership  property  to  pay  the  debts  of  the  last  firm 
composed  of  the  two;  and  it  was  held  that  the  creditors  of 
the  first  two  firms  had  no  right  to  claim  any  portion  of  the 
fund  last  assigned,  and  that  it  was  distributable  exclusively 
among  the  creditors  of  the  last  firm.  So  in  McNiitt  v. 
StrayJioni  &  Hohson  (39  id.  269),  it  was  ruled  lliat  though 
the  general  rule  is  tliat  the  equities  of  the  creditors  are  to 
be  worked  out  through  the  equities  of  the  partners,  yet 
where  the  property  is  parted  with  by  sale  severally  made, 
and  neither  partner  has  dominion  or  possession,  there  is 
nothing  through  wliich  tlie  e(|uities  of  the  creditors  can 
work,  and,  therefore,  there  is  no  case  for  the  application  of 
the  rule.  See  also  Coovcr's  Appeal,  29  id.  9.  Unless,  there- 
fore, the  conveyances  of  the  partners  in  this  case  and  the 
act  of  fusion  were  fraudulent,  the  bank  of  which  the  com- 


608        ALIENATION  OF  INTERESTS   IN    PROPERTY 

plainant  is  receiver  has  no  claim  upon  the  property  now 
held  by  the  New  Orleans  and  Carrollton  Railroad  Com- 
pany, arising-  out  of  the  facts  that  it  is  a  creditor  of  the 
partnership,  and  was  such  a  creditor  when  tlie  property 
belonged  to  the  firm. 

The  bill,  it  is  true,  charges  that  the  several  transfers 
of  the  partners  were  illegal  and  fraudulent,  without  speci- 
fying wherein  the  fraud  consisted.  The  charge  seems  to 
be  only  a  legal  conclusion  from  the  fact  that  some  of  the 
transfers  were  made  for  the  payment  of  the  private  debts 
of  the  assignors.  Conceding  such  to  have  been  the  case,  it 
was  a  fraud  upon  the  other  partners,  if  a  fraud  at  all. 
rather  than  upon  the  joint  creditors, — a  fraud  which  those 
partners  could  waive,  and  which  was  subsequently  waived 
by  the  act  of  fusion.  Besides,  that  act  made  provision  for 
some  of  the  debts  of  the  partnership.  And  it  has  been 
ruled  that  where  one  of  the  two  partners,  with  the  consent 
of  the  other,  sells  and  conveys  one  half  of  the  effects  of  the 
firm  to  a  third  person,  and  the  other  partner  afterwards 
sells  and  conveys  the  other  half  to  the  same  person,  such 
sale  and  conveyances  are  not  prima  facie  void,  as  against 
creditors  of  the  firm,  but  are  prima  facie  valid  against  all 
the  world,  and  can  be  set  aside  by  the  creditors  of  the  firm 
only  by  proof  that  the  transactions  w^ere  fraudulent  as 
against  them.  Kimball  v.  Thompson,  13  ]\Ietc.  (Mass.) 
283;  Flach  ct  al.  v.  CJiarroii  ct  al.,  29  Md.  311.  A  similar 
doctrine  is  asserted  in  some  of  the  other  cases  we  have 
cited;  and  see  21  Conn.  130.  In  the  present  case  we  find 
no  such  proof.  We  discover  nothing  to  impeach  the  bona 
fides  of  the  transaction,  by  which  the  property  became 
vested  in  the  railroad  company. 

Thus  far  we  have  considered  the  case  without  refer- 
ence to  the  provisions  of  the  Louisiana  Code,  upon  which 
the  appellant  relies.  Art.  2823  of  the  Code  is  as  follows: 
"The  partnership  property  is  liable  to  the  creditors  of  the 
partnership  in  preference  to  those  of  the  individual  part- 
ner."    We  do  not  perceive  that  this  provision  differs  ma- 


CASE  z:  BEAUREGARD  609 

terially  from  the  general  rule  of  equity  we  have  stated.  It 
creates  no  specific  lien  upon  partnership  property,  which 
continues  after  the  property  has  ceased  to  belong  to  the^Dart- 
nership.  It  does  not  forbid  bona  fide  conversion  by  the 
partners  of  the  joint  property  into  rights  in  severalty,  held 
by  third  persons.  It  relates  to  partnership  property  alone, 
and  gives  a  rule  for  marshalling  such  property  between 
creditors.  Concede  that  it  gives  to  joint  creditors  a  priv- 
ilege while  the  property  belongs  to  the  partnership,  there 
is  no  subject  upon  which  it  can  act  when  the  joint  owner- 
ship of  the  partners  has  ceased.  Art.  3244  of  the  Code 
declares  that  privileges  become  extinct  "by  the  extinction 
of  the  thing  sul^ject  to  the  privilege." 

What  we  have  said  is  sufficient  for  a  determination  of 
the  case.  If  it  be  urged,  as  was  barely  intimated  during 
the  argument,  that  the  property  sought  to  be  followed  be- 
longs in  equity  to  the  bank,  or  is  clothed  with  a  trust  for 
the  bank,  because  it  was  purchased  with  the  bank's  money, 
the  answer  is  plain.  There  is  no  satisfactory  evidence  that 
it  was  thus  purchased.  It  cannot  be  identified  as  the  sub- 
ject to  the  acquisition  of  which  money  belonging  to  the 
bank  was  applied. 

The  bank  has,  therefore,  no  specific  claim  upon  the 
property,  nor  is  there  any  trust  which  a  court  of  equity  can 
enforce ;  and  it  was  well  said  by  the  circuit  justice,  that, 
without  some  constituted  trust  or  lien,  "a  creditor  has  only 
the  right  to  prosecute  his  claim  in  the  ordinary  courts  of 
law,  and  have  it  adjudicated  before  he  can  pursue  the  prop- 
erty of  his  debtor  by  a  direct  proceeding"  in  equity. 

Decree  affirmed. 


6in        ALIENATION  OF   INTERESTS  IN  PROPERTY 


THAYER  7'.  HUMPHREY. 

DAVIES  v.  HUMPHREY. 

In  the  Supreme  Court  of  Wisconsin,  1895. 

91   IVisconsin  Reports,  276. 

A.  J.  Goss  and  J.  D.  Putnam  were  partners,  under  the 
firm  name  of  J.  D.  Putnam  &  Co.  The  firm  was  insolvent. 
It  was  dissolved,  J.  D.  Putnam  selling  out  his  interest,  with 
the  understanding  that  the  business  should  be  continued  by 
a  new  firm  known  as  J.  B.  Goss  &  Co.  The  consideration 
for  the  sale  on  Putnam's  part  was  that  the  new  firm  should 
assume  and  pay  all  the  old  firm  debts.  He  supposed  that 
J.  B.  Goss  was  the  real  purchaser,  though  the  transfer  was 
made  to  A.  J.  Goss,  who  shortly  after  transferred  to  J.  B. 
Goss.  The  new  firm  was  advertised  as  J.  B.  Goss  &  Co., 
and  no  notice  was  given  of  any  change  from  the  old  firm 
other  than  what  was  indicated  in  the  change  of  the  firm 
name.  A.  J.  Goss  in  fact  dropped  out;  so  that  J.  B.  Goss 
became  sole  proprietor,  but  A.  J.  Goss  was  still  held  out  as 
a  partner  in  such  a  way  as  to  make  him  liable  for  all  the 
debts  of  J.  B.  Goss  &  Co.  The  ostensible  firm  actually 
assumed,  by  agreement  with  the  creditors,  nearly  all  the 
debts  of  the  old  concern,  and  among  them  the  debt  of  the 
appellant  Lottie  Thayer,  but  did  not  so  assume  the  debt  of 
the  a])pellant  Davies.  Such  ostensible  firm  also  incurred 
other  ol)ligations.  It  was  insolvent  from  the  start,  and,  in 
the  course  of  events, — in  efi^ect,  by  the  act  of  J.  B.  Goss, — 
made  an  assignment  for  the  benefit  of  creditors ;  and  A.  J. 
Goss,  being  insolvent,  made  an  assignment  for  the  benefit 
of  creditors  as  well.  There  was  then,  in  fact,  no  firm, 
though  there  was  an  ostensible  firm;  no  firm  assets,  strictly 
so  called,  because  there  was  no  firm  in  fact ;  yet  there  were 
a:i-(-ts   t'wil    weic   (Avned   and   used   in   the   business   of   the 


THAYER  7'.  HUMPHREY— DAVIES  7'.  HUMPHREY     611 

ostensible  firm  of  J.  B.  Goss  &  Co.,  and  that  passed  into 
the  possession  of  the  assignee  of  J.  B.  Goss, — hence  assets 
of  the  ostensible  firm.  There  is  no  Hving  solvent  partner.^ 
Marshall,  J. :  Now,  in  this  situation,  can  the  cred- 
itors of  J.  B.  Goss,  doing  business  as  J.  B.  Goss  &  Co.,  who 
were  so  circumstanced  as  to  be  entitled  to  hold  J.  B.  Goss 
and  A.  J.  Goss  liable  as  members  of  an  ostensible  firm, — 
and  all  the  creditors,  at  least  of  the  new  concern,  including 
those  having  claims  against  the  old  firm  that,  by  arrange- 
ment with  them,  have  been  assumed  and  made  debts  of  J. 
B.  Goss  &  Co.,  are  so  circumstanced  in  fact, —  prove  their 
claims  pcn'i  passu  with  the  individual  creditors  of  A.  J.  Goss 
in  his  assignment?  Also,  can  the  creditors  of  the  firm  of 
J.  D.  Putnam  &  Co.  so  prove? 

This  presents  interesting  questions  of  law,  some  of 
which  have  not  heretofore  been  presented  to  or  decided  by 
this  court, — questions  upon  which  there  is  such  conflict  of 
authority  in  this  country  that  the  true  rule  to  be  adopted  has 
not  been  arrived  at  without  difiiculty,  and  then  not  with 
the  unanimous  decision  of  the  court,  which  is  to  be  re- 
gretted. Nevertheless,  after  careful  consideration  of  the 
state  of  the  law  as  held  by  the  courts  of  this  countiy  and  of 
England  as  well,  we  have,  as  we  believe,  reached  a  conclu- 
sion thoroughly  grounded  in  the  well  recognized  principles 
of  equity  jurisprudence,  which  should  1)e  applied  in  the 
progressive  si)irit  that  ever  has  and  should  ever  character- 
ize the  growth  and  application  of  such  principles.  They 
should  not  only  not  be  lost  sight  of,  but  the}-  should  not 
be  fenced  in  and  restricted  within  such  narrow  limits  as  to 
lead  to  a  suspicion  of  their  correctness,  but  should  be  ap- 
plied on  such  well-defined  lines  as  to  leave  no  doubt  in  re- 
spect to  their  true  character  and  scope. 

There  are  several  propositions  of  law  that  apply  which 
are  well    established, — too  well    to  need    to  be    more  than 


'  The  facts  as  stated  have  been  in  part  taken  from  the  statement  of 
Marshall,  J.,  and  in  part  from  the  statement  of  facts  made  by  the 
Reporter. 


612        ALIENATION  OF  INTERESTS  IN  PROPERTY 

Stated, — among  which  are  that  the  assets  of  an  insolvent 
partnership,  in  insolvency  proceedings,  must  be  applied  first 
to  the  payment  of  the  partnership  del)ts ;  that,  generally 
speaking,  partnership  creditors  cannot  prove  in  competition 
with  the  individual  creditors  of  a  partner;  that  the  fixed 
rule  is  that  joint  estate  must  go  to  joint  creditors,  and  sepa- 
rate estate  to  separate  creditors,  though  the  former  may 
prove  pari  passu  with  separate  creditors  when  there  is  no 
living  solvent  partner  and  no  partnership  assets. 

Now,  in  this  case  there  is  no  solvent  jiartner.  J.  D. 
Putnam,  J.  B.  Goss,  and  A.  J.  Goss  are  all  insolvent.  So. 
keeping  in  mind  the  above  stated  propositions  of  law,  the 
vital  question  is,  Are  there  any  partnership  assets  to  which 
appellants  can  resort?  If  there  are  such,  then  the  founda- 
tion stone,  upon  which  they  construct  their  claim  of  right 
to  share  pari  passu  with  the  individual  creditors  of  A.  J. 
Goss,  disappears. 

On  that  subject  we  shall  not  attempt  to  harmonize  the 
large  number  of  cases  that  can  be  found  in  this  country. 
The  simple  question  of  whether,  when  there  is  an  ostensi- 
ble firm  by  holding  out  to  creditors  generally,  the  property 
of  such  firm  is  to  be  considered,  in  equity,  joint  property 
for  the  administration  thereof  in  insolvency,  the  same  as  if 
such  property  belonged  to  a  firm  in  fact,  is  the  key  to  the 
situation.  That  it  ought  to  be  so  considered  is,  we  assume, 
too  clear  for  argument;  that  is  to  say,  if  A  and  B  do  busi- 
ness with  persons  generally  as  A  &  Co.,  and  incur  liabili- 
ties to  such  persons  who  deal  in  good  faith,  believing  that 
there  is  a  firm  in  fact  as  well  as  in  name,  and  under  sucli 
circumstances  that  they  have  a  right  to  believe  it  is  com- 
posed of  A  and  B,  and  the  business  becomes  insolvent,  the 
property  of  the  ostensible  firm  should  be  considered,  to  all 
intents  and  purposes,  in  regard  to  the  administration  of  the 
business  in  insolvency  under  the  control  and  direction  of  a 
court  of  equity,  the  same  as  if  they  were  partners  in  fact. 
The  doctrine  that  estops  B  from  saying  that  he  is  not  a 
partner  of  A  at  the  suit  of  the  creditors  of  the  ostensible 


THAYER  7'.  HUMPHREY— DAVIES  v.  HUMPHREY     613 

firm,  should  estop  A  from  holding  that  the  property  is  his 
individual  property  to  the  prejudice  of  those  who  dealt  with 
the  firm  as  a  firm  in  fact,  and  should  estop  the  creditors  of 
the  ostensible  firm,  in  the  case  of  the  bankruptcy  of  such 
firm,  from  resorting  primarily  to  the  individual  property  of 
the  members  of  such  firm ;  in  short,  should  work  effectu- 
ally to  compel  liquidation  in  all  respects  the  same  as  if  the 
members  of  such  firm  were  just  what  they  seem  to  be. 
This  is  what  the  doctrine  of  estoppel  is  for;  that  is  what 
equity  is  supposed  to  accc^mplish, — to  prevent  fraud  and 
promote  justice  between  man  and  man  in  the  administra- 
tion of  human  affairs.  And  we  are  therefore  prepared  to 
find  that  such  is  the  law  as  substantially  declared  by  the 
court  of  appeals  in  chancer}-  of  England. 

In  ///  re  Rozvlaiid  &  Cranksliaw,  i  Ch.  App.  421,  the 
precise  question  here  under  consideration  was  presented. 
The  business  was  conducted  in  the  name  of  Rowland  &  Co. 
Crankshaw  was  held  to  be  the  ostensible  partner,  in  a  con- 
test to  determine  whether  the  property  should  be  adminis- 
tered in  bankruptcy  as  joint  property  of  Crankshaw  and 
Rowland,  partners,  or  as  the  individual  property  of  the  one 
who  was  the  actual  owner.  The  opinion  of  the  court,  which, 
being  short,  can  best  be  stated  by  quoting  it  in  full  so  far  as 
relates  to  the  particular  question  under  consideration,  is  by 
Lord  Cranworth,  as  follows: 

"In  the  administration  of  bankruptcy  it  has  been  the 
object  from  the  earliest  times  to  apportion  the  assets  as 
fairly  as  possible  between  the  joint  and  separate  creditors. 
There  is  found  much  difficulty  in  doing  this  satisfactorily, 
but  some  rules  have  been  clearly  laid  down,  for  instance, 
that  the  joint  property  pays  the  joint  creditors,  and  the 
separate  property  pays  the  separate  creditors.  Now,  what 
is  said  here  is  that  this  estate,  though  said  to  be  joint,  is  in 
fact  separate.  These  two  gentlemen  traded  under  the  name 
of  Rowland  &  Co.,  and  tradesmen  supj^lied  them  with  large 
quantities  of  goods,  and  then  they  became  bankrupts,  and  it 
is  now  said  that  they  were  not  partners,  and  that  the  real 


614        ALIENATION  OF  INTERESTS  IN  PROPERTY 

arrangement  between  them  was  that  everything  belonged  tc 
Crankshaw.  That  is  no  reason ;  and,  as  Crankshaw  suffered 
Rowland  to  trade  in  the  name  of  the  firm,  any  persons 
trading  with  him  are  entitled  to  say  that  Rowland  &  Crank- 
shaw are  the  persons  with  whom  they  dealt  and  that  the 
goods  are  joint  goods." 

This  is  a  most  concise  statement  of  the  law,  as  held  by 
the  English  court  of  chancery.  The  meaning  is  too  plain 
and  unmistakable  to  leave  any  room  for  discussion,  and  we 
find  that  the  rule  so  tersely  stated  has  been  adhered  to  and 
repeatedly  approved  in  subsequent  cases  in  language  rather 
tending  to  extend  than  restrict  the  principle  involved.  In 
Ex  parte  Sheen  [In  re  JVright),  6  Ch.  Div.  235,  the  ques- 
tion was  again  before  the  court,  where  the  circumstances 
were  that  there  was  no  general  holding  out,  and  the  court 
held  that  where  there  is  no  ostensible  partnership  by  a  hold- 
ing out  to  creditors  generally,  but  only  a  holding  out  to  two 
or  three  creditors,  the  facts  are  not  sufficient  to  make  the 
property  of  the  alleged  ostensible  firm  joint  estate.  This, 
though  not  referring  to,  inferentially  approves  /;/  re  Ro7U- 
land  &  Crankshaiv.  In  Ex  parte  Hay  man  (In  re  Puls- 
ford),  8  Ch.  Div.  11,  the  question  again  came  before  the 
court  of  chancery,  on  appeal  from  the  chief  judge  in  bank- 
ruptcy, and  In  re  Roivland  &  Crankshaw  was  expressly  ap- 
proved. The  case  so  clearly  covers  the  two  cases  under 
consideration  that  we  quote  liberally  from  the  opinion, 
after  stating  the  facts.     Such  facts  are  as  follows: 

Prior  and  up  to  August  31,  1875,  Hayman,  Catford, 
and  Pulsford  carried  on  business  as  Hayman,  Pulsford  & 
Co.  On  that  date  the  firm  was  dissolved  and  notice  was 
published  stating  the  fact.  At  the  same  time  a  letter  was 
sent  to  each  of  the  persons  with  whom  the  firm  had  done 
business,  stating  the  fact  of  dissolution  and  that  thereafter 
the  business  would  be  carried  on  by  Thomas  Pulsford,  un- 
der the  style  of  Pulsford,  Son  &  Co.  Thereafter  the  busi- 
ness was  so  conducted.  Tom  Pulsford,  the  son  of  Thomas 
Pulsford,  took  an  acti\e  part  in  conducting  the  business  up 


THAYER  f.  HUMPHREY— DAVIES  7'.  HUMPHREY     615 

to  the  time  the  insolvency  occurred,  when  Thomas  Pulsford 
filed  a  petition  in  bankruptcy;  and  on  the  suggestion  that, 
on  account  of  the  way  the  business  had  been  conducted,  it 
might  be  held  that  the  father  and  son  were  partners,  a  peti- 
tion was  also  filed  by  them  as  joint  traders.     The  creditors 
resolved  upon  a  liquidation  by  arrangement,  and  such  reso- 
lution was  registered.     Hayman,  a  separate  creditor  of  the 
father  in  respect  to  matters  outside  the  firm  of  Pulsford, 
Son  &  Co.,  appealed  from  the  order  for  a  liquidation  of  the 
business  as  that  of  a  firm,  on  the  ground  that  there  was  no 
partnership.     He  prevailed,  and  the  registration  was  can- 
celed, and  the  decree  was  not  appealed  from.     Thereafter 
the  father  and  son  signed  a  declaration  of  insolvency,  upon 
which  Ravenscroft,  a  creditor,  presented  a  petition  alleging 
that  they  had  treated  father  and  son  as  partners,  under  the 
firm  name  of  Pulsford,  Son  &  Co.,  on  which  an  adjudica- 
tion was  made  against  them  by  consent.     Hayman  then  ap- 
pealed to  the  court  to  annul  the  adjudication.     On  this  ap- 
plication, following  In  re  Rozclajid  &  Cvankshaz<\  the  ap- 
plication was  ciisniissed  on  the  ground  that,  though  no  ac- 
tual partnership  Jiad  subsisted  betzveen  father  and  son,  yet 
the  son  had  been  held  out  as  a  partner  to  the  petitioning 
creditor  to  such  an  extent  as  to  enable  him  to  maintain  the 
adjudication.     This  decision  was  not  appealed  from.     Hay- 
man then  applied  to  the  court  for  an  order  declaring  that 
all,  or  such  portion  as  the  court  should  think  proper,  of 
the  estate  whicli  appeared  in  the  acts  of  the  bankrupt  or 
either  of  them  as  joint  estate,  formed  part  of  the  separate 
estate  of  the   father,  and   for  a  direction  that  the  trustee 
should  treat  the  same  accordingly  as  separate  estate  of  the 
father.      Hayman  was  the  only  separate  creditor,  that  is, 
creditor  outside  those  of  the  business  of  Pulsford,  Son  & 
Co.     On  the  hearing  the  evidence  showed  that  substantially 
all  the  creditors  did  business  with  Pulsford,  Son  &  Co.  as 
a  firm  consisting  of  the  father  and  son,  though  it  appeared 
that  the  father  was  the  actual  owner  of  the  business  and 
that  there  was  no  firm  in  fact.     Hayman's  application  was 


616        ALIENATION  OF  INTERESTS  IN  PROPERTY 

refused,  and  he  appealed.  On  the  hearing  of  this  appeal  in 
the  chancery  division  of  the  high  court  of  justice,  James, 
L.  J.,  propounded  to  appellant's  counsel  the  following  in- 
terrogatory :  "//  /  go  to  a  shop,  and  find  flic  names  Thomp- 
son &  Jones  on  the  door,  and  I  go  in  and  find  Thompson 
and  Jones  selling  goods,  am  I  not  zvarranted  in  believing 
that  they  are  partners?"  to  which  answer  was  made  in  ef- 
fect:  "That  zvonld  not  change  the  nature  of  the  assets, 
and  make  property  zvliich  belonged  to  the  father  in  fact  the 
joint  property  of  father  and  son," — just  as  it  is  claimed  in 
this  case,  it  will  be  observed.  Appellants  contend  that  the 
fact  of  holding  ont  sufficient  to  constitute  an  ostensible  firm 
of  J .  B.  Goss  &  Co.  zvill  not  change  the  nature  of  the  assets 
so  as  to  make  the  individual  property  of  J .  B.  Goss  joint 
property,  in  equity,  of  J.  B.  Goss  &  Co.  The  positions  are 
identical.  In  the  opinion  of  the  court  this  is  answered  by 
James,  L.  J.  After  reciting  the  facts  in  In  re  Rozvland  & 
Crankslunv,  as  in  Lord  Cranworth's  opinion  in  that  case, 
he  says : 

"Every  point  of  that  judgment  applies  to  this  case, 
with  this  single  exception,  which  fact  is  in  favor  of  the  de- 
cision of  the  registrar,  that,  instead  of  the  words  used  being 
'&  Co.,'  which  is  an  ambiguous  term  and  might  mean  any- 
body in  the  world,  the  words  are  'Pulsford,  Son  &  Co.' 
But  it  is  said  that  this  conclusion  will  work  hardship  to  the 
appellant,  who  is  a  creditor  of  the  father  alone.  I  think 
that  is  only  one  of  those  misfortunes  which  occur  to  per- 
sons who  deal  with  others  who  afterwards  become  insol- 
vent and  become  bankrupt,  having  partners.  The  hardship 
ivould  have  been  exactly  the  same  upon  Hayman  if  there 
had  been  a  real  partnership  created  by  a  formal  instrument. 
The  same  consequences  zvoiild  then  haz'c  happened  as  hap- 
pen where  there  is  only  an  ostensible  partnership."  It  will 
be  distinctly  noted  at  this  point  tliat  the  court  makes  no  dis- 
tinction in  the  administration  of  estates  of  an  ostensible  and 
an  actual  firm  in  bankruptcy.  The  lord  justice  proceeds 
"The  rule  has  been  established  that  joint  creditors  take  th 


J 


THAYER  z'.  HUMPHREY— DAVIES  r.  HUMPHREY     617 

joint  estate  and  separate  creditors  take  the  separate  estate, 
and  you  only  have  to  consider  what  is  joint  and  what  is 
separate  estate,  and  you  must  apply  the  rule  independejitly 
of  the  hardship.  The  supposed  hardships  are  those  which 
it  may  inflict  in  any  particular  case.  We  can  only  apply 
the  fixed  rule  that  that  which  is  joint  estate  shall  go  to  the 
joint  creditors,  and  that  which  is  separate  estate  shall  go 
to  the  separate  creditors." 

The  reasoning  of  these  cases  is,  in  our  opinion,  un- 
answerable, and  we  deduce  therefrom  the  principle  of  law 
that,  if  a  person  allows  another  to  carry  on  business  in 
such  a  way  as  to  amount  to  a  holding  out  to  persons  gen- 
erally that  he  and  such  other  are  partners,  and  credit  is 
given  to  both  on  the  supposition  that  they  are  partners  in 
fact  the  property  with  which  such  business  is  carried  on, 
though  in  law  that  of  such  person,  in  equity  will  be  treated 
as  the  joint  property  of  such  person  and  such  other ;  and 
neither  of  them,  nor  the  creditors  of  either,  can  prove  up  in 
insolvency  in  competition  with  the  creditors  who  have  trusted 
the  two  as  partners  and  the  business  as  that  of  the  two. 
To  the  same  effect  is  Van  Klceck  v.  McCabe,  87  Mich.  599. 
Applying  the  law  thus  stated  to  the  Cjuestion  under  consid- 
eration, the  conclusion  is  easily  reached  that,  while  there 
are  no  firm  assets  at  law  of  the  ostensible  firm  of  J.  B. 
Goss  &  Co.,  all  the  property  used  by  J.  B.  Goss  in  conduct- 
ing the  business,  in  equity,  is  the  joint  property  of  such 
ostensible  firm,  and  to  it  all  the  creditors  of  such  ostensible 
firm  can  resort,  the  same  in  all  respects  as  if  there  had  been 
a  firm  in  fact. 

This  effectually  disposes  of  the  appeal  of  appellant. 
Lottie  Thayer,  though  it  is  as  effectually  ruled  by  the  law 
applicable  to  the  Davies  appeal,  as  will  appear  by  what  fol- 
lows. Appellant  Davies  never  became  a  creditor  of  J.  B. 
Goss  or  of  J.  B.  Goss  &  Co.,  by  any  agreement  to  which  he 
was  a  party ;  and,  while  his  appeal  presents  the  question  of 
whether  there  is  any  joint  property  to  which  he  can  resort. 


618         ALIEXATION  OF  INTERESTS   IN   PROPERTY 

such   question   involves  a  different  (juestion   from  the  one 
discussed  as  i)articularly  api)hcable  to  the  Thayer  appeal 

We  must  start  the  discussion  of  the  Davies  appeal  with 
the  propositions  of  law — in  respect  to  which,  though  there 
is  some  conflict,  they  are  too  well  established  by  the  great 
weight  of  authority  to  be  questioned  by  this  court — that 
partnership  creditors  have  no  lien  on  the  partnership  assets 
independent  of  the  equity  of  the  partners,  but  must  work 
out  their  preference  over  the  individual  creditors  of  the 
members  of  the  partnership  through  the  equities  of  such 
members;  that,  so  long  as  the  equity  of  the  individual  mem- 
bers of  the  partnership  exists  to  have  the  partnership  prop- 
erty applied  to  the  partnership  debts,  the  creditors  have  the 
equity  to  compel  its  enforcement;  that  if  one  member  sells 
his  interest,  bona  fide,  to  his  copartner  or  a  stranger,  with- 
out in  any  way  retaining  his  equity  to  have  the  partnership 
creditors  paid  out  of  it,  the  joint  property  is  thereby  con- 
verted into  the  individual  property  of  the  purchaser.  The 
question  to  be  determined  is,  in  view  of  the  facts  that  the 
sale  was  made  by  Putnam  in  consideration  of  the  debts  of 
the  partnership  being  paid ;  that  the  firm  was  insolvent  at 
the  time ;  that  the  whole  transaction  was  really  made  by 
him  to  relieve  himself  from  the  partnership  liability ;  that 
the  property  was  put  into  the  possession  of  J.  B.  Goss  for 
the  purpose  of  continuing  the  same  business  with  the  same 
assets  and  effecting  a  settlement  of  the  old  partnership  af- 
fairs,— all  of  which  clearly  appears.  Can  it  be  held  that  the 
equitable  title  to  the  property  was  changed,  so  as  to  affect 
the  equitable  right  of  Putnam  to  have  the  creditors  of  the 
old  firm  paid  out  of  it,  or  were  the  equitable  rights  of  the 
outgoing  partner  and  the  creditors  preserved  by  reason  of 
the  facts,  and  the  assets  in  the  hands  of  J.  B.  Goss  im- 
pressed with  a  trust  to  carry  out  the  intention  of  the  par- 
ties? 

In  discussing  these  questions,  full  effect  should  be 
given  to  the  significant  controlling  words  in  the  rule,  cor- 
rectly stated  in  IVillis  v.  Thompson,  85  Tex.  301,  "without 


THAYER  7'.  HUMPHREY— DAVIES  v.  HUMPHREY     619 

preserving"  the  lien  in  any  manner."  In  Coiiroy  v.  JVoods, 
13  Cal.  626,  it  was  held  that  where  a  sale  is  made  by  one 
partner  to  his  copartner,  and  the  consideration  for  the  sale 
is  the  pa}'ment  of  the  partnership  debts,  the  sale  is  not  bona 
fide  and  within  the  meaning  of  the  rnle,  so  as  to  cut  of?  the 
equity  of  the  vendor  to  have  the  property  applied  to  the 
payment  of  the  partnership  debts.  Very  few  cases  can  be 
found  that  go  as  far  as  the  California  court  on  this  sub- 
ject, except  in  the  New  Hampshire  court,  which  does  so, 
holding  that  the  creditor  has  an  equitable  interest  indepen- 
dent of  the  equity  of  the  individual  partner.  In  Ex  parte 
Cooper,  I  Mont.,  D.  &  D.  358,  and  Ex  parte  WiUiams,  1 1 
Ves.  3,  it  is  held  that  where  an  outgoing"  partner  sells  hoiia 
fide  to  his  copartner,  and  takes  for  his  consideration  an 
agreement  that  the  purchaser  shall  pay  the  debts,  no  equi- 
table interest  in  the  property  is  retained.  To  the  same  ef- 
fect are  Stafiton  v.  IVestover,  loi  N.  Y.  265;  Fidton  v. 
Hughes,  63  Miss.  61  ;  Dimon  v.  Hazard,  32  N.  Y.  65;  and 
many  other  cases  that  might  be  cited.  In  Darby  v.  Gilli- 
gaii,  ^^  W.  Va.  246,  it  is  held  that  where  a  fii*m  is  insol- 
vent, if  a  partner  sells  out  to  his  copartner,  and  the  pur- 
chaser agrees  to  pay  the  firm  debts,  the  sale  cannot  be  con- 
sidered bo)ia  fide,  so  as  to  cut  off  the  equity  of  the  firm 
creditors  to  be  preferred ;  and  to  the  same  effect  is  Olson 
v.  Morrison,  29  Mich.  395.  In  the  latter  case  Olson  and 
Jones  were  partners.  Olson  sold  out  to  Morrison,  the  con- 
sideration being"  that  the  vendee  should  pay  the  debts  of  the 
firm.  It  sufficiently  appears  that  the  firm  was  insolvent. 
The  vendee  neglected  to  comply  with  his  agreement,  and 
the  creditors,  joining  wnth  the  vendor,  brought  suit  to  com- 
pel performance  of  the  agreement  and  to  subject  the  prop- 
erty to  the  payment  of  the  partnership  debts.  Held,  that 
the  agreement  to  pay  the  debts  as  consideration  for  the 
transfer  was  a  sufticient  recognition  of  the  equitable  lien  of 
the  partnership  creditors,  tracing  the  same  through  the 
equity  of  the  vendor,  to  enable  them,  joining  with  him,  to 
enforce  such  equity. 


620        ALIENATION  OF  INTERESTS  IN  PROPERTY 

In  Mcnayli  v.  Uliit-d'cll,  52  N.  Y.  146,  it  was  held  that, 
as  between  the  hrm  and  its  creditors,  the  title  of  the  former 
to  the  joint  property  is  not  divested  by  any  separate  trans- 
fers to  outside  parties  for  the  individual  benefit  of  the  re- 
spective vendors,  and  that,  when  there  has  been  no  trans- 
fer by  the  firm  as  such,  conveying  the  corpus  of  the  prop- 
erty, and  it  remains  /;;  s/->ccic,  though  transferred  by  the 
separate  transfers  of  the  individual  members,  it  may  yet  be 
followed  and  reached  in  the  hands  of  those  claiming  under 
such  separate  transfers,  by  creditors  of  the  firm.  This  is 
upon  the  theory  that  neither  partner  separately  has  any  in- 
terest in  the  corpus  of  the  property ;  that  his  interest  is  lim- 
ited to  his  proportionate  share  of  what  remains  after  a  set- 
tlement of  all  partnership  obligations  and  an  accounting  be- 
tween himself  and  his  copartner.  A  distinction  is  drawn  in 
this  case  between  a  Invia  fide  sale  by  one  of  a  partnership  to 
two  of  his  copartners  without  reservation,  which,  under  the 
prevailing  rule  of  E.v  parte  Ruffin,  6  Ves.  119,  operates  to 
liberate  the  assets  from  the  partnership  liability,  and  a  sale 
made  by  one  member  of  a  firm  of  more  than  two,  to  one  of 
the  partners,  or  to  an  outside  party.  In  that  class  of  cases 
the  New  York  courts  have  uniformly  held,  since  Mcnagh 
v.  UliitwcU,  that  the  partnership  effects  are  not  liberated 
from  the  partnership  liability.  In  this  case,  if  it  is  held 
that  the  sale  was  really  to  J.  B.  Goss,  under  the  New  York 
rule  the  corpus  of  the  property  never  passed  by  any  act  of 
the  firm  so  as  to  change  the  equitable  title  in  respect  to 
creditors  existing  at  the  time  of  the  sale. 

The  trend  of  the  New  York  cases  since  Mcnagh  v. 
Jl'hifu'cll  has  been  to  extend  the  rule  which  preserves  the 
equity  of  the  creditors  in  case  of  the  sale  by  one  of  the 
members  of  an  insolvent  firm,  the  purchaser  assuming  the 
partnership  obligations  in  place  of  the  outgoing  partner, 
whether  such  sale  is  to  a  copartner  or  otherwise.  Tliis 
clearly  appears  by  the  following,  from  the  opinion  in  Bul- 
ger V.  Rosa,  119  N.  Y.  465  :  "The  equity  of  the  firm  cred- 
itors cannot  be  defeated  by  any  attempted  conversion  of 


THAYER  t'.  HUMPHREY— DAVIES  v.  HUMPHREY     621 

the  assets  of  the  insolvent  firm  into  the  individual  assets  of 
one  of- the  partners,  through  a  transfer  by  one  partner  of 
his  interest  therein  to  the  other.  In  such  a  case,  till  the 
assets  come  to  the  hands  of  a  bona  fide  purchaser,  the  same 
can  be  reached  by  the  partnership  creditors."  To  the  same 
efifect  are  Nordlingcr  v.  Anderson,  123  N.  Y.  544,  and  Pey- 
ser V.  Myers,  135  N.  Y.  599.  In  the  latter  case  there  had 
been  a  change  in  the  firm  some  time  prior  to  the  assign- 
ment for  the  benefit  of  creditors,  the  new  firm  not  having 
made  any  express  contract  to  pay  the  old  firm  debts.  There 
were  two  sets  of  creditors,  and,  in  discussing  the  subject  of 
their  equitable  rights,  the  court  said:  "The  priority  of  the 
lien  of  firm  creditors  is  not  divested  by  the  transfer  by  an 
insolvent  firm  of  the  assets  to  one  or  more  of  the  partners, 
nor  can  it  be  afi^ected  by  any  mere  change  in  the  personnel 
of  the  firm,  as  by  the  withdrawal  of  one  partner  from  the 
firm  or  the  introduction  of  another."  See,  also,  Phelps  v. 
McNeely,  66  Mo.  554,  where  it  was  held  that  if  a  partner 
sells  out  his  interest  in  the  firm  to  his  copartner,  who  agrees 
to  pay  the  debts,  the  firm  being  at  the  time  insolvent,  the 
ecjuities  of  the  creditors  are  preserved.  The  evidence  in 
that  case  tended  to  show  that  there  was  no  property,  other 
than  that  formerly  ])elonging"  to  the  partnership,  out  of 
which  the  firm  debts  could  be  paid ;  but  it  does  not  clearly 
appear  whether  the  court  rested  its  decision  on  the  ground 
that  there  was  an  implied  promise  under  the  circumstances 
to  pay  the  firm  debts  out  of  the  partnership  assets,  or  on 
the  ground  that  the  insolvency  of  the  firm  impeached  the 
bona  fides  of  the  transaction.  The  court  went  further,  and 
held  that,  notwithstanding  the  vendee  of  the  property  had 
turned  the  same  out  to  secure  his  individual  creditors,  who 
had  received  it  as  security  in  good  faith,  it  could  neverthe- 
less be  reached  by  the  partnership  creditors ;  but  this  was 
subsequently  overruled  in  /;/  re  Edi\.'ards:  Goddard-Peck 
Grocery  Co.  v.  McCune,  122  Mo.  426. 

We  might  go  on  at  great  length  reviewing  decisions  on 
this  subject,  and  cite  numerous  authorities  w4iere  outgoing 


622         ALIENATION  OF  INTERESTS  IN  PROPERTY 

partners  have  been  held  to  retain  their  e(|uity  to  have  the 
firm  debts  paid,  and  the  rights  of  the  creditors  to  the  assets 
which  have  come  under  the  control  of  equity  have  been 
worked  out  through  the  e(|uity  of  such  partners.  Probably 
there  are  few  questions  upon  which  there  is  such  a  conflict 
of  authority  as  the  one  under  consideration ;  but  nearly  all 
are  in  harmony  with  the  principle  that  if  the  bona  fides  of 
the  transaction  is  impeached,  or  if  the  equity  is  retained  by 
agreement,  express  or  implied,  then  the  creditors  can  en- 
force such  equity.  The  conflict  chiefly  arises  in  regard  to 
what  circumstances  or  facts  are  sufficient  to  impeach  the 
good  faith  of  the  transaction,  and  in  respect  to  what  is 
sufiicient  to  show  a  contract  that  the  partnership  debts  shall 
be  paid  out  of  the  partnership  assets,  and  impress  a  trust 
upon  such  assets  for  that  purpose. 

By  the  mere  fact  of  the  dissolution  of  a  partnership  by 
one  member  selling  out  to  his  copartner  or  to  a  stranger, 
the  purchaser  or  purchasers  agreeing,  as  consideration  for 
the  purchase,  to  pay  the  partnership  debts,  the  firm  being 
insolvent  at  the  time,  no  presumption  of  a  bona  fide  agree- 
ment arises  which  will  operate  to  change  the  equitable  title 
of  the  property ;  and  such  agreement  must  clearly  appear 
to  exist  inconsistent  with  the  continuance  of  the  equitable 
rights  of  the  partner,  and,  through  him,  of  the  partnership 
creditors;  else  it  is  retained.  Lindley,  Partn.  699.  If  the 
circumstances  are  such  as  to  show  that  the  property  was 
merely  transferred  for  the  puri)ose  of  winding  up  the  af- 
fairs of  the  concern,  there  being  no  express  agreement  that 
the  property  shall  be  exclusively  that  of  the  vendee,  it  will 
in  case  of  bankruptcy,  be  distributed  as  joint  estate.  Lind- 
ley, Partn.  699,  700.  This  is  upon  the  presumption  that 
such  was  the  intention  of  the  parties.  The  presumptions  to 
be  indulged  in,  in  such  cases,  rather  go  to  support  an  im- 
plied agreement  to  do  what  in  equity  and  good  conscience 
the  parties  ought  to  do.  In  Scdaiii  v.  JJ'illiaius,  4  McLean, 
51,  and  Marsh  v.  Bennett,  5  McLean,  117,  it  was  held  that 
the  equity  was  retained  to  have  the  partnership  creditors 


THAYER  t'.  HUMPHREY— DAVIES  v.  HUMPHREY     623 

paid  out  of  the  partnership  assets,  and  that  such  assets  were 
impressed  with  a  trust  for  that  purpose  by  virtue  of  an  ex- 
press agreement.  In  ///  re  Dawson,  59  Hun,  239,  which 
does  not  appear  to  ha\'e  been  appealed  from  or  criticised, 
it  was  held  that  where  one  member  of  a  hrm  retires,  selling 
out  his  interest  to  a  third  party,  who  continues  the  business 
with  the  remaining  partner,  with  whom  he  enters  into  part- 
nership, and  the  partnership  assumes  the  debts  of  the  previ- 
ous firm,  and  such  new  firm  becomes  insolvent  and  makes 
an  assignment  for  the  Ijenefit  of  creditors,  the  property 
transferred  to  the  new  firm  becomes  charged  in  equity  with 
a  trust  for  the  payment  of  the  debts  of  the  old  firm,  which 
the  outgoing  partner  may  enforce.  Such  holding  is  cer- 
tainly equitable  and  just  when  applied  to  a  state  of  facts, 
as  in  this  case,  which  leaves  no  room  for  doubt  but  that  it 
was  the  intention  of  all  the  parties  dealing  with  the  prop- 
erty to  preserve  and  administer  the  partnership  assets  in  the 
nature  of  a  trust  to  liquidate  the  old  debts;  and  to  this  ex- 
tent we  expressly  approve  of  and  apply  it  here. 

This  does  not  in  the  least  trench  upon  the  rule  that  if  a 
partner  sells  out,  bona  fide,  his  interest  in  the  partnership 
assets  and  business,  without  in  any  manner  retaining  his 
equity  to  have  the  partnership  creditors  paid  out  of  such 
assets,  he  waives  his  equity  in  that  regard,  but  is  perfectly 
consistent  with  it.  If  the  agreement  was  express  that  the 
debts  shall  be  paid  out  of  the  assets,  then  the  equity  is  re- 
tained by  express  contract;  if  the  circumstances  of  the 
transaction  show  that  the  contemplation  of  the  parties  was 
that  the  debts  should  be  so  paid,  then  the  equity  is  retained 
by  implied  agreement ;  and  the  assets  are,  in  the  adminis- 
tration of  the  afifairs  of  the  purchaser  in  insolvency,  as  ef- 
fectually impressed  with  a  trust  in  favor  of  the  vendor  and, 
through  him,  the  creditors  of  the  old  partnership,  in  the  one- 
case  as  in  the  other.  The  circumstances  involved  in  these 
appeals  point  luierringly  to  the  conclusion  that  it  was  the 
intention  of  J.  D.  Putnam.  J.  B.  Goss,  and  A.  J.  Goss  that 
the  new  concern  of  J.  B.  Goss  &  Co.  should  continue  the 


624         ALIENATION  OF  INTERESTS  IN   PROPERTY 

old  business  with  the  same  assets,  for  the  primary  purpose 
of  winding  up  such  business  and  hquidating  the  debts  there- 
tofore contracted  in  it  out  of  the  old  assets,  so  far  as  prac- 
ticable. Hence  the  court  below,  sitting  as  a  court  of  equity 
in  the  administration  of  the  affairs  of  A.  J.  Goss  and  J.  B. 
Goss,  was  warranted  in  concluding  that  the  property  of  J. 
B.  Goss  is  impressed  with  a  trust  to  carry  out  the  intention 
of  all  the  parties  concerned  in  the  dissolution  of  the  old 
firm  and  formation  of  the  new  concern  of  J.  B.  Goss  &  Co., 
that  the  debts  of  the  old  firm  should  be  assumed  by  the  new 
concern  and  be  paid  out  of  the  property  turned  over  to  it 
and  the  operations  of  tiie  lousiness,  so  far  as  this  can  be 
done  with  due  regard  to  the  equities  of  the  creditors  who 
trusted  such  new  concern. 

On  the  subject  of  whether  the  two  sets  of  creditors — 
those  of  the  old  firm  of  J.  D.  Putnam  &  Co.,  and  those  of 
the  ostensible  firm  of  J.  B.  Goss  &  Co. — can  all  prove  in 
the  insolvency  proceedings  of  J.  B.  Goss,  though  that  sub- 
ject need  not  be  decided  here,  w'e  cite  Ex  parte  Chuck  {In 
re  Starkey  &  JVIiitcsidc),  8  Bing.  469,  an  early  English 
case,  which  covers  the  subject ;  and,  so  far  as  we  are  able 
to  find,  it  has  never  been  criticised  or  overruled.  The  facts 
were  that  S.  &  S.  had  been  doing  business  for  some  time 
as  copartners,  and  were,  as  such,  indebted  to  various  per- 
sons. They  took  in  W.,  and  thereafter  the  business  was 
conducted  by  S.,  S.  &  W.,  as  copartners.  The  new  firm 
became  bankrupt,  and  there  were  creditors  of  both  the  old 
and  the  new  firm  as  well.  The  court  held  substantially  as 
follows:  "We  are  of  the  opinion  that  the  creditors  of  S. 
&  S.  and  those  of  S.,  S.  &  W.  should  be  admitted  to  prove 
pari  passu  upon  the  joint  assets  of  the  new  firm."  To  the 
same  effect  is  Froiv,  Jacobs  &  Co.'s  Estate,  73  Pa.  St.  459. 
Foresman  sold  out  his  interest  in  an  existing  firm,  having 
creditors,  to  the  remaining  members,  who  agreed  to  pay  the 
debts.  The  vendees  continued  business  as  a  firm  with  the 
same  assets  for  a  time,  and  finally  made  an  assignment  for 
the  benefit  of  creditors.     Held  that  the  two  said  creditors — 


THAYER  V.  HUMPHREY— DAVIES  v.  HUMPHREY     625 

those  of  the  old  firm  and  those  of  the  new  firm — might 
prove  pari  passu  against  the  assets  of  the  new  firm ;  That 
Frow,  Jacobs  &  Co.  were  Hable  for  the  debts  as  partners  in 
the  firm  of  Foresman  &  Co.,  which  they  took  npon  them- 
selves when  Foresman  retired  from  the  firm  and  they  con- 
tinued the  business.  When  Foresman  sold  out,  the  pur- 
chasers intended  to  continue  the  business.  They  took  all 
the  assets  and  assumed  the  debts.  The  assets  became  the 
capital  of  the  new  firm,  and  the  old  debts  became  its  debts. 
Under  these  facts,  the  court  readily  reached  the  conclusion 
that  the  creditors  of  the  old  and  of  the  new  firm  should 
stand  on  an  equal  footing  in  the  settlement  of  the  new  firm 
in  bankruptcy.  To  the  same  effect  are  ///  ;v  Dazvsoti,  59 
Hun,  239;  Shcdd  v.  Ba)ik  of  Brattlchoro,  t,2  Vt.  709;  Fil- 
ley  V.  Phelps,  18  Conn.  294;  and  JJ'riglif  v.  Carman,  19  N. 
Y.  Supp.  696.  Held,  in  latter  case,  and  in  Frozv,  Jacobs  & 
Co.'s  Estate,  supra,  and  In  re  Daivson,  supra,  that  the  debts 
of  the  old  became,  by  reason  of  the  facts,  the  debts  of  the 
new  firm.  To  the  same  effect  is  Peyser  v.  Myers,  135  N. 
Y.  599,  where  it  is  distinctly  held  that  if  there  is  a  change 
in  the  personnel  of  an  insolvent  firm,  and  it  subsequently 
makes  an  assignment  for  the  benefit  of  the  creditors, — there 
being  an  agreement,  express  or  implied,  at  the  time  of  the 
change,  that  the  new  firm  shall  assume  and  pay  the  old 
debts, — the  equity  of  the  old  creditors  is  equal  to  that  of 
the  new.  There  was  no  express  agreement  in  that  case,  but 
the  court  held  that  there  was  an  implied  agreement. 

This  effectually  disposes  of  all  the  questions  presented, 
and  leads  to  the  conclusion  that  neither  of  the  appellants 
can  prove  pari  passu  with  the  individual  creditors  of  A.  J. 
Goss  in  his  assignment,  l)ut  they  can  both  prove  pari  passu 
with  all  the  creditors  of  the  ostensible  firm  of  J.  B.  Goss  & 
Co.,  in  the  assignment  of  J.  B.  Goss. 

This  opinion  has  been  quite  lengthy,  but  it  may  be 
well  justified  from  the  importance  of  the  questions  involved. 
In  reaching  the  conclusion  arrived  at  by  the  majority  of 
the  court,  we  resort  to  cases  merely  to  determine  what  well- 


626        ALIENATION  OF  INTERESTS  IN  PROPERTY 

defined  principles  have  been  established  applicable  to  the 
facts  of  the  appeals  before  ns.  Having  come  to  a  satisfac- 
tory conclusion  in  that  regard,  we  endeavor  to  broadly 
apply  them  so  as  to  satisfy  effectually  the  ends  of  justice, 
which  are  obviously  the  legitimate  ends  for  which  sucli 
principles  have  been  worked  out  in  the  growth  of  equity 
jurisprudence.  By  so  doing  the  assets  of  J.  B.  Goss,  held 
and  used  by  him  as  those  of  the  ostensible  firm  of  J.  B. 
Goss  and  A.  J.  Goss,  will  be  marshaled  and  administered 
along  definite  lines,  without  confusion  or  uncertainty  as  to 
the  rights  of  the  various  sets  of  creditors  and  parties  in- 
terested. 

In  order,  now,  that  the  principles  of  equity  jurispru- 
dence here  applied  may  definitely  appear,  we  recapitulate 
as  follows : 

1.  In  the  administration  of  the  affairs  of  a  partnership 
and  of  the  individual  members  thereof,  the  fixed  rule  must 
be  applied  that  joint  estate  goes  first  to  joint  creditors,  and 
separate  estate  to  separate  creditors,  with  the  exception  that 
where  there  are  no  partnership  assets,  and  there  is  no  living 
solvent  partner,  partnership  creditors  may  prove  with  the 
separate  creditors  of  a  partner  in  the  settlement  of  his  es- 
tate pari  passu. 

2.  Partnership  creditors  have  no  lien,  strictly  so  called, 
on  partnership  assets,  but  must  work  out  their  preference 
over  the  creditors  of  the  individual  members  of  the  part- 
nership through  the  equities  of  such  members. 

3.  If  one  of  a  partnership  sells  out,  boiia  fide,  his  in- 
terest to  his  copartner  or  to  another,  without  in  any  way 
retaining  his  equity  to  have  the  partnership  creditors  i)aitl 
out  of  the  assets,  the  property  is  converted  into  the  in- 
dividual property  of  the  purchaser,  free  from  all  the  equi- 
ties of  the  seller,  even  if  the  purchaser,  as  the  consideration 
for  such  purchase,  agrees  to  pay  the  firm  debts ;  otherwise, 
if  the  purchaser  agrees  expressly  or  impliedly  to  api)ly  the 
assets  to  such  purpose. 

4.  The  word  "assets",  used  in  No.  i,  is  not  confined  to 


THAYER  7'.  HUMPHREY— DAVIES  v.  HUMPHREY     627 

assets  at  law,  but  includes  all  asssets  applicable  to  the  pay- 
ment of  the  partnership  debts,  under  the  well-defined  prin- 
ciples for  the  administration  of  the  affairs  of  insolvent  part- 
nerships under  the  direction  of  a  court  of  equity. 

5.  Those  who  deal  with  persons  representing  them- 
selves to  creditors  generally  as  partners  in  a  certain  busi- 
ness are  entitled  to  have  the  property  used  in  such  business 
applied  to  the  payment  of  the  debts  incurred  in  such  busi- 
ness in  preference  to  the  individual  deljts  of  the  members 
of  the  partnership,  and  the  ostensiljle  member  of  such  part- 
nership is  likewise  entitled  to  have  the  assets  of  the  osten- 
sible firm  so  applied. 

6.  If  a  member  of  an  insolvent  firm  sells  out  with  the 
understanding  that  the  business  is  to  be  continued  with  the 
same  assets,  and  the  purchaser  or  purchasers,  as  considera- 
tion for  the  sale,  are  to  assume  and  pay  the  old  debts,  and 
the  circumstances  are  such  as  to  evidence  the  fact  that  the 
purpose  of  the  transaction  is  to  pay  the  old  firm  debts  and 
to  wind  up  the  old  partnership  concern  by  the  payment  of 
the  debts  of  such  concern  out  of  the  partnership  assets  and 
a  continuation  of  the  business,  the  court  is  warranted  in 
concluding  that  the  equity  of  the  outgoing  partner  to  have 
the  assets  of  the  firm  applied  to  the  payment  of  the  firm 
debts  is  not  changed,  and  that  the  right  of  the  creditor  to 
enforce  it  continues. 

7.  If  one  of  the  meml)ers  of  an  insolvent  firm  sells  out 
his  interest  to  an  outside  party  or  to  his  associates,  and 
therein'  a  new  firm  is  formed,  which  assumes  the  debts  of  the 
old  firm,  the  intention  of  all  the  parties  being  that  the  new 
firm  shall  continue  the  Ijusiness  in  substantially  the  same  way 
with  substantially  the  same  assets  and  that  the  old  debts 
shall  be  paid  out  of  such  lousiness,  and  such  new  firm  subse- 
quently makes  an  assignment  for  the  benefit  of  cred- 
itors, in  the  administration  of  the  assignment  the  creditors 
of  the  old  and  the  new  firm  may  prove  their  claims  pari 
passu  and  be  preferred  over  individual  creditors  of  the 
members  of  such  new  firm. 


628        ALIENATION  OF  INTERESTS  IN  PROPERTY 

By  the  Court. — -The  orders  appealed  from  are  affirmed, 
and  the  causes  remanded  for  further  proceedings  according 
to  law. 

Newman.  J.  [Dissenting  opinion  in  the  case  of 
Thayer  v.  Humphrey]."  The  rule  is  fully  settled,  in 
the  administration  of  the  estates  of  insolvents,  that 
the  partnership  debts  are  primarily  payable  out  of 
the  partnership  assets  and  are  entitled  to  a  prefer- 
ence over  the  individual  debts  of  the  insolvent ;  and 
so,  in  the  reverse  case,  the  individual  debts  are  pri- 
marily payable  out  of  the  individual  assets  of  the  insolvent 
and  possess  a  like  preference.  The  surplus  only,  after  satis- 
fying such  priorities,  can  be  reached  by  the  other  class  of 
debts.  For  this  purpose  the  joint  estate  and  the  separate 
estate  of  the  insolvent  constitute  separate  funds,  to  be  ad- 
ministered separately.  Story,  Partn.  (7th  ed.).  Sec.  376;  17 
Am.  &  Eng.  Ency.  of  Law,  1202,  and  cases  cited  in  note  i  ; 
Parsons  Partn.  (4th  ed.).  Sec.  382;  note  to  McCulloh  v. 
Dashiell's  Adui'r,  18  Am.  Dec.  271;  Murrill  v.  Neill,  8 
How.  414;  Curtis  v.  Jl'oodword,  58  Wis.  499. 

There  are  certain  exceptions  to  this  rule,  which  go  to 
prove  and  ascertain  it.  One  such  exception,  which  is  as 
well  settled  as  the  rule  itself,  is  the  case  where  there  are  no 
partnership  assets  to  be  administered  and  no  living  solvent 
partner.  Where  there  are  no  partnership  assets  to  be  ad- 
ministered and  no  living  solvent  partner,  then  the  joint 
creditor  is  entitled  to  share  pari  passu  with  the  individual 
creditors  of  the  separate  estate.  Story,  Partn.  (7th  ed.), 
Sec.  378;  17  Am.  &  Eng.  Ency.  of  Law,  1205,  and  cases 
cited  in  note  4;  Curtis  v.  Woodward,  58  Wis.  499;  Parsons, 
Partn.  (4th  ed. ),  Sec.  384,  note  1. 

In  the  instant  case  there  was,  in  fact,  no  partnership. 
There  are  no  partnership  assets.  There  is  no  living  solvent 
partner.  The  case  seems  to  come  clearly  within  the  excep- 
tion to  the  rule  as  above  stated.     There  was  no  partner- 

'^^r-'^«l 

"A  part  only  of  this  opinion  is  reprinted. 


THAYER  r.  HUMPHREY— DAVIES  v.  HUMPHREY    629 

ship.  The  trial  court  so  decided,  and  that  is  conchisive  here. 
The  fact  that  there  was  no  partnership  is  absolute  proof 
that  there  are  no  partnership  assets.  It  is  undisputed  that 
J.  D.  Putnam,  Alfred  J.  Goss  and  James  B.  Goss,  all  the 
debtors  involved  in  the  controversy,  are  all  and  each  in- 
solvent. 

J.  D.  Putnam,  conveyed  all  his  interest  in  the  partner- 
ship property  of  J.  D.  Putnam  &  Co.,  in  November,  1891, 
to  Alfred  J.  Goss.  Alfred  J.  Goss  conveyed  the  entire 
property  to  James  B.  Goss.  James  B.  Goss  assigned  the 
•entire  property  for  the  benefit  of  his  creditors.  Alfred  J. 
Goss  has  assigned  all  his  property  for  the  benefit  of  his 
creditors.  There  is  absolutely  no  property  in  existence 
which  any  one  claims  to  be  partnership  assets  of  James  B. 
Goss  and  Alfred  J.  Goss.  To  require  the  petitioner  to 
pursue  for  her  remedy  any  such  supposititious  partnership 
assets  is  to  mock  her  with  the  delusive  promise  of  a  remedy 
which  must  inevitably  disappoint  the  expectation  which  it 
fosters. 

The  circumstance  that  the  property  which  James  B. 
Goss  assigned  for  the  benefit  of  his  creditors  is,  in  part,  the 
same  property  which  was  once  the  firm  property  of  J.  D. 
Putnam  &  Co.,  is  of  no  significance.  No  equity  of  the  cred- 
itors of  J.  D.  Putnam  &  Co.  followed  this  property  into  the 
hands  of  James  B.  Goss.  There  is  no  hint  of  bad  faith  in 
the  transfer,  or  that  it  was  made  in  contemplation  of  in- 
solvency. The  rights  of  creditors  in  the  assets  of  a  partner- 
ship must  be  worked  out  through  the  equities  of  the  part- 
ners. If  the  partner  has  no  right,  the  creditor  has  none. 
The  right  of  the  partners  is,  in  effect,  a  right  to  share  in 
the  suq^lus  left  after  discharging  all  the  firm  debts.  Each 
partner  has  the  right  to  require  all  the  firm  assets  to  be 
applied  to  the  payment  of  tlie  firm  debts;  for  so,  only,  can 
his  liability  in  solido  for  them  be  diminished.  But  this  right 
of  a  partner  is  property  which  can  be  sold  and  transferred. 
It  is  effectually  sold  and  transferred  by  a  sale  and  transfer, 
in  good  faith,  of  all  his  interest  in  the  firm  property,  whether 


630        ALIENATION  OF  INTERESTS  IN  PROPERTY 

to  his  partner  or  to  a  stranger.  Such  a  sale  and  transfer 
dissolves  the  partnership  and  extinguishes  every  right  which 
the  retiring  partner  had  in  the  firm  property,  including  the 
right  to  require  it  to  be  applied  to  the  payment  of  firm 
debts,  unless  such  right  is  preserved  by  the  terms  of  the 
sale.  Story,  Partn.  (7th  ed. ),  Sees.  307,  358,  360;  Bates, 
Partn.  Sees.  528,  540,  550-552;  Parsons,  Partn.  (4th  ed. ), 
Sees.  178,  246,  248,  394.  note  i  on  ])age  330,  and  cases  cited; 
Collyer,  Partn.  (Perkins'  ed.  ),  Sees.  894,  904,  905  ;  Lindley, 
Partn.  (Am.  ed.,  with  Audenreid's  notes,  1888),  407,  765; 
35  Cent.  Law  J.  418.  and  cases  cited  in  note  3  on  page  421  ; 
17  Am.  &  Eng.  Ency.  of  Law,  970-975,  and  cases  cited  in 
note  3;  Case  v.  Beauregard,  99  U.  S.  119;  Fitzpatrick  v. 
Flaiiiiagaii,  106  U.  S.  648;  Hiiiskainp  v.  Moline  JV.  Co. 
121  U.  S.  310,  T,2^;  Baker's  Appeal,  21  Pa.  St.  76;  Ladd 
V.  Griszvold,  9  111.  25 ;  /;^  i-e  Lloyd,  22  Fed.  Rep.  88 ;  Sau}i- 
ders  V.  Reilly,  105  N.  Y.  12;  Davis  v.  D.  &  H.  C.  Co.  109 
N.  Y.  47;  Robb  V.  Miidge,  14  Gray,  534.  The  effect  is  the 
same  where  the  remaining  partner  or  other  purchaser  as- 
sumes the  debts  of  the  firm.  This  is  a  personal  contract 
only,  and  leaves  the  retiring  partner  in  the  condition  of  an 
unsecured  creditor.  Bates,  Partn.  Sec.  528 ;  Story,  Partn. 
(7th  ed. ),  559;  17  Am.  &  Eng.  Ency.  of  Law,  975;  Robb 
V.  Mudge,  14  Gray,  534.  Such  sales  of  a  partner's  in- 
terest in  firm  property  are  presumed  to  be  valid.  Kimball 
V.  Thompson,  13  Met.  283.  The  authorities  are  nearly 
uniform.     Only  a  few  cases  are  out  of  line. 

These  considerations  seem  to  show  sufficiently  that 
there  are  no  joint  assets  of  Alfred  J.  Goss  and  James  B. 
Goss,  and  so  that  the  petitioner  has  the  right  to  go  against 
the  individual  assets  of  either  in  the  hands  of  their  re- 
spective assignees.     The  case  properly  ends  here. 

Newman,  J.:  [Dissenting  opinion  in  the  case  of 
Dovies  V.  Humphrey]"'  This  case  arises  out  of  the  same 
failures  and  assignments  as  Thayer  v.   Humphrey,  but  in 


'  A  part  only  of  this  opinion  is  reprinted.     Pinney.  J.,  also  dissented 
in  both  cases,  concurring  in  both  opinions  of  Newman,  J. 


THAYER  ^'.  HUMPHREY— DAVIES  z'.  HUMPHREY     631 

some  of  its  circumstances  differs  from  that  case.    The  appel- 
lant was  also  a  creditor  of  J.  D.  Putnam  &  Co.,  but  he  did  not 
accept  of  J.  B.  Goss  &  Co.  as  a  substitute  for  his  original 
debtor.     So  he  is  not  a  creditor  of  either  James  B.  Goss  or 
J.  B.  Goss  &  Co. ;  and  neither  are  in  any  way  liable  for  his 
claim.     The  appellant  seeks  to  prove  his  claim  against  the 
estate  of  Alfred  J.  Goss  in  the  hands  of  the  assignee  for  the 
benefit  of  his  creditors.     It  is  answered  to  his  application : 
"Your  remedy  is  against  the  assets  of  James  B.  Goss,  wdiich 
are  in  the  hands  of  his  assignee  for  the  benefit  of  his  cred- 
itors."    And  so  he  is  turned  away.     It  is  not  claimed  that 
there  are  any  firm  assets  of  J.  D.  Putnam  &  Co.  in  existence, 
nor  that  either  partner  is  solvent,  nor  that  the  transfer  to  J. 
B.  Goss  &  Co.  did  not  pass  the  legal  title  to  all  the  assets 
of  J.  D.  Putnam  &  Co.  to  J.  B.  Goss  &  Co.     But  it  is  held 
that  the  right  of  the  partners  to  have  these  assets  applied 
first  to  the  payment  of  the  debts  of  the  firm  was  reserved 
by  the  terms  and  conditions  of  the  transfer.     This  is  be- 
lieved to  be  without  a  shadow  of  foundation  in  fact.     It  is 
put  upon  the  ground  that  the  transaction  was  for  the  pur- 
pose of  applying  the  assets  of  the  firm  to  the  payment  of  its 
debts;  and  this  in  the  teeth  of  all  the  evidence.     The  firm 
of  J.  D.  Putnam  &  Co.  was  composed  of  J.  D.  Putnam  and 
Alfred   J.    Goss.      Both    partners    signed    and    published   a 
notice  of  the  dissolution  of  the  firm,   in  which  the  public 
was  notified  that  the  same  lousiness  would  be  continued  by 
J.  B.  Goss  &  Co.,  who  assumed  all  the  debts  of  the  firm; 
and  the  same  business  was  in  fact  carried  on  at  the  same 
l)lace  by  J.  B.  Goss  &  Co.  for  two  years  and  upward.     It 
does  not  seem  necessary  to  say  that  the  intent  to  have  the 
business  carried  on  with  the  same  property  is  incompatible 
with  the  purpose  to  have  the  property  applied  to  the  pay- 
ment of  the  debts.    The  greater  part  of  the  property  received 
by  J.  B.  Goss  &  Co.  was  the  gristmill  itself.     J.  B.  Goss  & 
Co.  got  nothing  of  value  for  the  promise  to  pay  the  debts 
of  the  old  firm,  unless  they  got  the  right  to  carry  on  the 
business  with  the  property  received  from  the  old  firm.     The 


632        ALIENATION  OF  INTERESTS  IN   PROPERTY 

real  intention  of  the  transaction  is  obvious.  It  was  to  make 
a  novation  of  the  debts  of  the  old  firm, — to  substitute  a 
new  debtor  in  place  of  the  old  one.  This  was  not  alto- 
gether effected,  because  some  of  the  old  creditors  did  not 
consent  to  the  substitution.  If  the  purpose  was  to  apply  the 
firm  property  to  the  payment  of  firm  debts,  the  obvious 
way  to  make  the  purpose  effectual  was  to  make  an  assign- 
ment of  it  for  the  benefit  of  the  firm's  creditors.  It  seems 
that  this,  clearly  was  the  ordinary  case  of  a  transfer  of  the 
firm's  assets  for  the  purpose  of  a  novation.  In  such  a  case 
all  are  agreed  that  the  partners  of  the  old  firm  lose  their 
.equity  to  have  the  assets  transferred  applied  to  the  payment 
of  the  firm  debts.^ 


*  York  County  Bank's  Appeal,  32  Pa.  446,  1859.  (A  and  B  entered 
into  an  agreement  which  declared  that  they  had  formed  a  partnership  in 
the  livery  business ;  that  A  was  to  contribute  all  the  capital  and  have 
exclusive  ownership  of  the  same  until  B  had  contributed  certain  sums, 
the  profits  to  be  shared  equally.  An  execution  was  issued  against  A 
and  levied  on  the  stock.  Afterwards  an  execution  was  issued  against 
the  firm  and  also  levied  on  the  stock.  B  had  not  made  the  contributions 
which  under  the  contract  gave  him  an  interest  in  the  stock.  Held,  that 
the  separate  execution  creditor  was  entitled  to  the  proceeds  of  the  sale.) 

Bixlcr  v.  Kresge,  169  Pa.  405,  1895.  (A  employed  B  in  his  business, 
B  permitting  A  to  hold  him,  B,  out  as  a  partner.  Held,  that  the  cred- 
itors of  the  business  had  no  priority  over  the  other  creditors  of  A.) 


WILLIAMSON  V.  SMOOT  633 


SECTION   2.— CORPORATION   CASES. 


WILLIAMSON  V.  SMOOT. 
In  the  Supreme  Court  of  Louisiana,  1819. 

7  Martin's  Reports,  31. 

Appeal  from  the  court  of  the  first  district. 

Mathews,  J.,  dehvered'the  opinion  of  the  court.  The 
plaintiffs  having  caused  an  attachment  to  be  levied  on  the 
steam  boat  Alabama,  the  St.  Stephens  steam  boat  company 
intervened  in  their  corporate  capacity,  and  claimed  her  as 
their  property.  The  interv^ening  party  are  a  body  politic, 
created  by  an  act  of  the  legislature  of  the  territory  of  Ala- 
bama, the  capital  stock  of  which  is  divided  into  shares  of  a 
certain  amount,  and  Smoot  the  defendant  owns  ten  of  them, 
subscribed  for  by  him. 

The  questions  to  be  decided  are  i.  Is  it  proper  for  our 
courts  of  justice  to  recognise,  in  their  judicial  proceedings, 
the  company  as  a  corporate  body?  2.  Can  the  shares  or 
stock  of  any  individual  stockholder  be  legally  attached?^ 

II.  The  existence  of  the  claimants  being  recognised  as 
a  body  corporate,  and  it  being  admitted  that  the  boat  at- 
tached belongs  to  them  as  a  part  of  their  common  stock,  it 
is  clear  that  Smoot  does  not  possess  such  certain  and  disinct 
individual  property  in  it,  as  to  make  his  interest  attachable. 
The  estate  and  rights  of  a  corporation  belong  so  completely 
to  the  body,  that  none  of  the  individuals  who  compose.it 
has  any  right  of  ownership  in  them,  nor  can  dispose  of  any 
part  of  them.     Civ.  Code,  88,  art.  11. 

The  court  is  of  opinion  that  the  district  court  erred  in 
disallowing  the  claim  of  the  company. 


'  Only  that  part  of  the  opinion  which  relates  to  the  second  question 
is  reprinted. 


634        ALIENATION  OF  INTERESTS  IN   PROPERTY 

It  is  therefore  ordered,  adjudged  and  decreed  that  the 
judgment  be  annulled,  avoided  and  reversed,  and  that  the 
attachment  of  the  plaintiff  and  appellant  be  quashed,  so  far 
as  it  relates  to  the  said  steam  boat  the  Alabama,  and  that 
she  be  released  therefrom.- 


"  In  our  principal  case  the  creditor  of  the  shareholder  attempted  to 
levy  on  his  debtor's  interest  in  the  tangible  property  of  the  corporation. 
In  the  absence  of  statute  had  he  attempted  to  levy  on  the  shares  of 
stock  held  by  his  debtor  he  would  not  have  been  any  more  successful. 
In  explanation  it  is  sometimes  said  that  a  share  of  stock  is  nothing 
more  than  a  chose  in  action  against  the  corporation,  and  that  at  the 
common  law  a  chose  in  action  is  not  subject  to  levy  and  sale.  It  is 
perhaps  more  correct  to  say  that  tangible  property  was  the  only  property 
subject  to  legal  execution  and  that  whatever  the  real  nature  of  the 
stockholders'  interest,  a  share  of  stock  was  an  "intangible  entity,"  and 
therefore  "incapable  of  caption  by  the  gross  methods  of  the  common 
law."  Cotuparc  opinion  of  Graves,  J.,  in  Van  Norman  v.  Jackson  Circuit 
Judge,  45  Mich.  204  (1881),  p.  208. 

By  statutes  passed  in  the  different  States  a  debtor's  legal  and  some- 
times his  equitable  interest  in  stock  is  made  subject  to  legal  execution. 


BUNDY  V.  IRON  CO.  635 


BUNDY  V.  IRON  CO. 
In  the  Supreme  Court  of  Ohio,  1882. 

38  Ohio  State  Rcforts,  300. 

Bundy,  a  stockholder  in  a  manufacturing  corporation, 
indorsed  notes  of  the  company  in  consideration  that  the  pay- 
ment of  the  notes  should  be  secured  and  the  indorser  pro- 
tected by  mortgage  on  the  property  of  the  company. 
Through  mistake  the  mortgage  was  made  by  the  stock- 
holders in  their  own  names  instead  of  in  the  name  of  the 
corporation.  A  subsequent  mortgage  was  made  in  the  name 
of  the  corporation  to  its  creditors,  and  recorded,  which,  by 
its  terms,  was  subject  to  the  first. 

This  was  an  action  by  Bundy  to  foreclose  his  mortgage.^ 

White,  J.  :  The  controversy  in  this  case  is  between 
Bundy,  claiming  as  first  mortgagee,  subsequent  judgment 
creditors,  and  creditors  claiming  under  the  second  mortgage. 

Two  questions  arise  for  consideration :  (  i  )  Whether 
the  execution  and  record  of  the  mortgage  of  December  5, 
1874,  to  Bundy  give  him  priority?  and,  (2)  If  not,  does 
the  recognition  of  the  first  mortgage  in  the  second,  of  April 
17,  1875,  have  that  efTect? 

As  to  the  first  question :  The  consideration  upon  which 
Bundy  indorsed  the  notes  as  surety  of  the  corporation,  was 
that  the  latter  should  give  him  a  mortgage  upon  its  property, 
conditioned  that  it  would  pay  the  notes  at  maturity,  and  save 
him  harmless  on  account  of  his  indorsements.  The  execution 
by  the  stockholders  of  the  first  mortgage  was  the  attempted 
fulfillment  of  the  agreement  on  the  part  of  the  cor[)oration. 

The  Ophir  Iron  Company  was  incorporated  under  the 
act  of  April  12,  1858,  providing  for  the  creation  and  regula- 
tion of  manufacturing  companies.     S.  &  C.  301,  304.    Under 

'  'I  lie   facts  are  restated  and  the   Reporter's  notes  of  the  arguments 
of  counsel  omitted. 


()36        ALIENATION  OF  INTERESTS  IN  PROPERTY 

that  act  the  (H rectors  of  the  company  are  required  to  be  stock- 
holders ;  and  while  it  is  declared  "the  directors  shall  have  the 
general  management  of  the  affairs  of  the  company,"  yet  they 
are  made  "subject  always  to  the  control  of  the  stockholders" 
in  reference  to  such  management. 

The  mortgage  to  Bundy  now  in  question,  not  being 
made  in  the  name  of  the  corporation,  cannot,  as  against  it, 
be  regarded  as  a  legal  mortgage;  but  it  is  a  good,  equitable 
mortgage  against  the  corporation.  And  if  such  direction 
were  necessary,  it  might  be  considered  as  equivalent  to  a 
direction  by  the  stockholders  to  the  proper  officers  to  mal<e  a 
mortgage  in  the  name  of  the  corporation  to  Bundy.  But  such 
direction  was  not  necessary  from  the  stockholders.  The 
directors,  under  the  agreement  by  which  they  obtained  Bun- 
dy's  indorsements  of  the  notes  of  the  corporation,  were 
bound  to  secure  him  by  the  mortgage  of  the  corporation. 
This  they  failed  to  do,  by  sheer  mistake,  in  the  form  of  ex- 
ecuting the  mortgage,  which  it  was  competent  for  a  court 
of  equity  to  correct ;  and  which  it  was  their  duty  to  correct 
without  the  action  of  the  court.  Clayton  v.  Freet,  lo  Ohio 
St.  544. 

If  it  were  not  for  oui*  statute  on  the  subject  of  mort- 
gages, this  equitable  mortgage  would  prevail  over  all  lien- 
holders  and  other  claimants,  except  bona  fide  purchasers, 
for  value.  But  it  has  been  held,  in  a  long  series  of  decisions, 
that  a  mortgage  has  no  effect,  under  the  statute,  either  in 
law  or  equity,  as  against  subsequently  acquired  liens,  until 
its  execution  according  to  the  statute,  and  its  delivery  to  the 
recorder  of  the  proper  county  for  record.  Strang  v.  Beach, 
II  Ohio  St.  283;  Bercazv  v.  Cockcrill,  20  Id.  163. 

But  such  execution  and  delivery  for  record  are  not 
required  as  between  the  original  parties  or  their  heirs.  Bloom 
V.  Noggle,  4  Ohio  St.  45 ;  Sidle  v.  Maxivcll,  Id.  236. 

The  second  question  is:  Does  the  recognition  of  the 
first  mortgage  in  the  second  have  the  effect  to  give  it  priority? 

We  think  this  question  must  be  answered  in  the  affirma- 
tive.    The  second  mortgage  was  executed  in  due  form  by 


BUNDY  V.  IRON  CO.  637 

the  corporation,  and  was  made  expressly  subject  to  the  mort- 
gage to  Biindy.  Hence,  all  subsequently  acquired  liens  that 
are  subject  to  the  second  mortgage  are  necessarily  also-sub- 
ject to  the  first.  Coe  v.  Railroad  Co.,  lo  Ohio  St.  374;  Bcr- 
cazv  y.  Cockcrill,  20  Id.  166.- 
Judgment  accordingly.^ 

"  The  rest  of  the  opinion  on  the  second  question  is  omitted. 

^Compare:  England  v.  Dearborn,  141  Mass.  590,  1886.  (Tort  for 
the  conversion  of  certain  property  to  which  A,  the  plaintiff,  claimed  title 
as  mortgagee.  A  proved  that  B  was  president,  treasurer,  general  man- 
ager and  owner  of  all  but  two  shares  of  the  C  Company;  that  he.  A, 
had  .endorsed  certain  notes  for  the  Company,  and  that  to  indemnify 
him,  A,  B  had  delivered  to  him  an  instrument  which  purported  to  be  a 
mortgage  by  the  C  Company  of  all  its  property  except  its  book  accounts. 
The  instrument  was  signed  by  B  as  president.  Held,  that  A's  suit  should 
be  dismissed,  as  he  failed  to  prove  that  the  C  Company  authorized  B  to 
make  the  mortgage ;  that  the  facts  did  not  warrant  the  inference  that 
B  had  any  implied  authority  to  mortgage  the  property,  and  that  the 
Company  had  received  no  benefit  from  the  mortgage.) 


638        ALIENATION  OF  INTERESTS  IN   PROPERTY 


BUTTON  V.  HOFFMAN. 
In  the  Supreme  Cour<T  of  Wisconsin.  1884. 

61   JViscuiisiii  Reports,  20. 

Orton,  J. :  This  is  an  action  of  replevin  in  which  the 
title  of  the  plaintiff  to  the  property  was  put  in  issue  by  the 
answer. 

In  his  instructions  to  the  jury  the  learned  judge  of  the 
circuit  court  said  :  "I  think  the  testimony  is  that  the  plain- 
tiff had  the  title  to  the  property."  The  evidence  of  the  plain- 
tiff's title  was  that  the  property  belonged  to  a  corporation 
kiiown  as  "The  Hayden  &  Smith  Manufacturing  Company," 
and  that  he  purchased  and  became  the  sole  owner  of  all 
of  the  capital  stock  of  said  corporation.  As  the  plaintiff  in 
his  testimony  expressed  it,  "I  bought  all  the  stock.  I  own 
all  the  stock  now.  I  became  the  absolute  owner  of  the  mill. 
It  belonged  at  that  time  to  the  company,  and  I  am  the  com- 
pany." There  was  no  other  evidence  of  the  condition  of 
the  corporation  at  the  time.  Is  this  sufficient  evidence  of 
the  plaintiff's  title?  We  think  not.  The  learned  counsel 
of  the  respondent  in  his  brief  says :  "The  property  had  for- 
merly belonged  to  the  Hayden  &  Smith  Manufacturing  Com- 
pany, but  the  respondent  had  purchased  and  became  the 
owner  of  all  the  stock  of  the  company,  and  thus  became  its 
sole  owner." 

From  the  very  nature  of  a  private  business  corporation, 
or,  indeed,  of  any  corporation,  the  stockholders  are  not  the 
private  and  joint  owners  of  its  property.  The  corporation 
is  the  real,  though  artificial,  person  substituted  for  the  nat- 
ural persons  who  procured  its  creation  and  have  pecuniary 
interests  in  it,  in  which  all  its  property  is  vested,  and  by  which 
it  is  controlled,  managed,  and  disposed  of.  It  must  purchase, 
hold,  grant,  sell,  and  convey  the  corporate  property,  and  do 
business,  sue  and  be  sued,  plead  and  be  impleaded,  for  cor- 


BUTTON  V.  HOFFMAN  639 

porate  purposes,  by  its  corporate  name.  The  corporation 
must  do  its  business  in  a  certain  way,  and  by  its  regularly 
appointed  officers  and  agents,  whose  acts  are  those  of  the 
corporation  only  as  they  are  within  the  powers  and  purposes 
of  the  corporation.  In  an  ordinary  copartnership  the  mem- 
bers of  it  act  as  natural  persons  and  as  agents  for  each  other, 
and  with  unlimited  liability.  But  not  so  with  a  corporation ; 
its  members,  as  natural  persons,  are  merged  in  the  corporate 
identity.  Aug.  &  A.  on  Corp.  sees.  40,  46,  100,  591,  595. 
A  share  of  the  capital  stock  of  a  corporation  is  defined  to  be 
a  right  to  partake,  according  to  the  amount  subscribed,  of 
the  surplus  profits  obtained  from  the  use  and  disposal  of 
the  capital  stock  of  the  company  to  those  purposes  for  which 
the  company  is  constituted".  Id.  sec.  557.  The  corporation 
is  the  trustee  for  the  management  of  the  property,  and  the 
stockholders  are  the  mere  ccstiii-quc-fntsts.  Gray  v.  Port- 
land Bank,  3  Mass.  365  ;  Eidiuan  v.  Bozviuan,  4  Am.  Corp. 
Cas.  350.  The  right  of  alienation  or  assignment  of  the 
property  is  in  the  corporation  alone,  and  this  right  is  not 
affected  by  making  the  stockholders  individually  liable  for 
the  corporate  debts.  Ang.  &  A.  on  Corp.  sec.  191  ;  Pope  v. 
Brandon,  2  Stewart  (Ala.),  401;  IVhitivcU  v.  JJ'arncr,  20 
Vt.  444.  The  property  of  the  corporation  is  the  mere  instru- 
ment whereby  the  stock  is  made  to  produce  the  profits,  which 
are  the  dividends  to  be  declared  from  time  to  time  by  cor- 
porate authority  for  the  benefit  of  the  stockholders,  while 
the  property  itself,  which  produces  them,  continues  to  be- 
long to  the  corporation.  Bradley  v.  Holdszvorfh,  3  Mees.  & 
W.  422;  J I 'all ham  Bank  v.  J I 'a! /ham,  10  Met.  334;  Tippets 
V.  Walker,  4  Mass.  595.  The  corporation  holds  its  property 
only  for  the  purposes  for  which  it  was  permitted  to  acquire 
it.  and  even  the  corporation  cannot  divert  it  from  such  use, 
and  a  shareholder  has  no  legal  right  to  it,  or  the  profits  aris- 
ing therefrom,  until  a  lawful  division  is  made  by  the  direc- 
tors or  other  proper  officers  of  the  corporation,  or  by  judicial 
determination.  Ang.  &  A.  on  Corp.  sees.  160,  190.  557; 
Hyatt  V.  Allen,  4  x\m.  Corp.  Cas.  624.     A  conveyance  of  all 


040         ALIEXATION  OF  INTERESTS  IN   PROPERTY 

the  capital  stock  to  a  purchaser  gives  to  such  purchaser  only 
an  equitable  interest  in  the  property  to  carry  on  business 
under  the  act  of  incorporation  and  in  the  corporate  name, 
and  the  corporation  is  still  the  legal  owner  of  the  same. 
IVildc  V.  Jenkins,  4  Paige,  481.  A  legal  distribution  of  the 
property  after  a  dissolution  of  the  corporation  and  settle- 
ment of  its  affairs,  is  the  inception  of  any  title  of  a  stock- 
holder to  it,  although  he  be  the  sole  stockholder.  Ang.  &  A. 
on  Corp.  sec.  779a. 

These  general  principles  sufficiently  establish  the  doc- 
trine that  the  owner  of  all  the  capital  stock  of  a  corporation 
does  not  therefore  own  its  property,  or  any  of  it,  and  does 
not  himself  become  the  corporation,  as  a  natural  person,  to 
own  its  property  and  do  its  business  in  his  own  name.  While 
the  corporation  exists  he  is  a  mere  stockholder  of  it,  and 
nothing  else.  The  consequences  of  a  violation  of  these  prin- 
ciples would  be  that  the  stockholders  would  be  the  private 
and  joint  owners  of  the  corporate  property,  and  they  could 
assume  the  powers  of  the  corporation,  and  supersede  its 
functions  in  its  use  and  disposition  for  their  own  benefit 
without  personal  liability,  and  thus  destroy  the  corporation, 
terminate  its  business,  and  defraud  its  creditors.  The  stock- 
holders would  be  the  owners  of  the  property,  and,  at  the 
same  time,  it  would  belong  to  the  corporation.  One  stock- 
holder owning  the  whole  capital  stock  could,  of  course,  do 
what  several  stockholders  could  lawfully  do.  It  is  said  in 
Utica  V.  Chtirchill,  33  N.  Y.  161,  "the  interest  of  a  stock- 
holder is  of  a  collateral  nature,  and  is  not  the  interest  of  an 
owner;"  and  in  Hyatt  v.  Allen,  supra,  that  "a  shareholder 
in  a  corporation  has  no  legal  title  to  its  property  or  profits 
until  a  division  is  made."  In  IVinona  &  St.  P.  R.  R.  Co.  v. 
St.  P.  &  S.  C.  R.  R.  Co.  23  Minn.  359,  it  is  held  that  the 
corporation  is  still  the  absolute  owner,  and  vested  with  the 
legal  title  of  the  property,  and  the  real  party  in  interest, 
although  another  party  has  become  the  owner  of  the  sole 
beneficial  interest  in  its  rights,  property,  and  immunities. 
In  Baldivm  v.  Canfield,  26  Minn.  43,  it  was  held  that  the 


BUTTON  z'.  HOFFMAN  641 

sole  owner  of  the  stock  did  not  own  the  land  of  the  corpora- 
tion so  as  to  convey  the  same.  In  Bartlett  v.  Brickett,  14 
Allen,  62,  an  action  of  replevin  was  brought  by  A.,  B.,'and 
C,  as  the  "Trustees  of  the  Ministerial  Fund  in  the  North 
Parish  in  Haverhill,"  which  was  the  corporate  name.  In 
portions  of  the  writ  the  plaintiffs  were  referred  to  as  "the 
said  trustees"  and  "the  said  plaintiffs."  In  the  bond,  "A., 
B..  and  C,  trustees  as  aforesaid,"  became  bound,  and  the 
officer,  in  his  return,  certified  that  he  had  taken  a  bond 
"from  the  within-named  A.,  B.,  and  C,"  and  the  property 
was  receipted  by  "A.,  B.,  &  C,  plaintiffs."  It  was  held 
that  the  action  was  not  by  the  corporation,  as  it  should  have 
been,  and  judgment  was  rendered  for  the  defendant.  It  is 
said  in  J\in  Allen  v.  Assessors,  3  Wall.  584,  "the  corpora- 
tion is  the  legal  owner  of  all  the  property  of  the  bank,  both 
real  and  personal."  In  U^ildc  v.  Jenkins,  supra,  where  a 
copartnership  bought  all  the  property  and  effects,  together 
with  the  franchises,  of  a  corporation,  and  elected  themselves 
trustees  of  the  corporation,  it  was  held  that  the  corporation 
was  not  dissolved,  and  that  the  legal  title  to  the  real  and 
personal  property  was  still  in  the  corporation  for  their  bene- 
fit. In  Mickles  v.  R.  C.  Bank,  11  Paige,  118,  it  was  held 
that,  although  a  corporation  was  deemed  to  have  surrendered 
its  charter  for  non-user,  it  was  not  dissolved,  and  would  not 
be  until  its  dissolution  was  judicially  declared,  and  that  until 
then  its  property  could  be  taken  and  sold  by  its  judgment 
creditors.  In  Bennett  v.  Am.  Art  Union,  5  Sandf.  Super. 
Ct.  614,  it  was  held  that,  "as  a  general  rule,  the  whole  title, 
legal  and  ecjuitable  [to  its  property],  is  vested  in  the  cor- 
poration itself,"  and  that  the  individual  members  have  no 
other  or  greater  interest  in  it  than  is  expressly  given  to  them 
by  the  charter,  and  the  prayer  of  the  complainant,  as  a  share- 
holder in  the  Art  Union,  for  an  injunction  against  a  certain 
disposition  of  its  property,  was  denied,  because  he  had  no 
interest  in  it.     See,  also,  Goodivin  v.  Hardy,  57  Me.  143. 

It  is  true  that  none  of  the  above  cases  are  precisely  paral- 
lel with  the  present  case  in  facts,  but  they  are  sufficiently  anal- 


642        ALIENATION  OF  INTERESTS  IN  PROPERTY 

ogoiis  to  be  authority  upon  the  principle  that  the  plaintiff, 
as  the  sole  stockholder  of  the  corporation,  is  not  the  legal 
owner  of  its  property.  He  may  have  an  equitable  interest 
in  it,  but  in  this  action  he  must  show  a  legal  title  to  the 
property  in  himself  in  order  to  recover,  and  he  has  shown 
that  such  title  is  in  another  person.  TiDip  v.  Dockham, 
32  Wis.  146;  Senscnhrcuncr  v.  Mothczvs,  48  Wis.  250.  In 
analogy  to  the  above  principle  it  was  held  in  Murphy  v. 
HonraJiaii.  50  Wis.  485,  that  the  sole  heirs  of  an  estate  did 
not  have  such  a  legal  title  to  a  promissory  note  given  to 
their  father  as  would  entitle  them  to  sue  the  maker  upon  it, 
because  the  title  to  it  was  in  the  administrator,  and  they 
could  obtain  -the.  title  only  by  administration  and  distribu- 
tion according  to  law.  The  heirs  in  that  case  certainly 
had  as  much  equitable  interest  in  that  note  as  this  plaintiff 
has  in  the  property  in  controversy.  The  want  of  title  to 
the  prpperty  being  fatal  to  the  plaintiff's  recovery  in  the 
action. between  the  present  parties,  other  alleged  errors  will 
not  be  considered. 

By  the  Court. — The  judgment  of  the  circuit  court  is 
reversed,  and  the  cause  remanded  for  a  new  trial. 


PARKER  V.  BETHEL  HOTEL  CO.  643^ 


PARKER  T'.  BETHEL  HOTEL  CO. 
In  the  Supreme  Court  of  Tennessee,  1895. 

96  Tennessee  Reports,  252. 

Lucius  Erierson  owned  a  large  number  of  the  shares 
of  the  Bethel  Hotel  Co.,  a  corporation.  These  in  large  part 
he  assigned  to  various  persons  as  collateral  security  for  the 
payment  of  his  notes.  The  company  sold  that  part  of  its 
property  in  which  it  had  conducted  a  hotel.  Erierson  pur- 
chased all  the  remaining  stock  of  the  company,  and  there- 
after managed  the  property  in  his  own  name.  He  then 
assigned  by  deed  in  his  own  name  all  the  property  of  the 
company  to  one  Webster,  in  trust,  to  sell  the  same,  for  the  ■ 
benefit  of  certain  of  his  creditors,  the  creditors  who  held  as' 
collateral,  the  stock  of  the  company  not  being  included. 
These  secured  creditors  brought  this  bill  against  the  Bethel 
Hotel  Company  and  Webster,  praying  that  the  property  of 
the  company  should  be  sold  for  the  benefit  of  the  holders  of 
the  stock,  and  that  Webster  be  restrained  from  proceeding 
under  his  deed.  A  decree  in  accordance  with  this  prayer 
being  granted,  and  the  decree  being  affirmed  by  the  Court 
of  Chancery  Appeals,  an  appeal  was  taken  to  the  Supreme 
Court.  1  - 

J.  C.  Bradford,  Sp.  J. :  Admitting  it  to  be  true, 
as  claimed,  that  Erierson  was  the  owner  of  all  the 
stock  of  the  corporation,  it  by  no  means  follows 
that  the  corporation  was  thereby  dissolved  and  for- 
feited its  franchises.  On  this  question  the  latest  text  writer 
on  corporation  law  has  this  to  say :  "Contrary  to  early 
opinion,  it  is  now  generally  held  that  the  fact  that  all  the 
shares  in  a  joint  stock  cnmi)any  ha\'e  passed  into  the  hands 
of  two  members,  or  even  into  the  hands  of  a  single  person, 
does  not,  ipso  facto,  work  a  dissolution  of  the  corporation, 
since  such  sole  owner  may  so  dispose  of  the  shares,  as,' .by 

^  The  facts  are  restated  and  only  a  portion  of  the  opinion  is  priiited. 


644        ALIENATION  OF  INTERESTS  IN  PROPERTY 

the  election  of  the  necessary  directors  and  officers,  to  con- 
tinue the  corporate  existence."  5  Thompson's  Commenta- 
ries on  the  Law  of  Corporations,  Sec.  6653.  And,  in  2  Mor- 
awetz  on  Corporations,  Sec.  1009,  it  is  said:  "It  is  well 
settled  that  all  the  shares  of  a  corporation  may  be  held  by 
a  single  person,  and  yet  the  corporation  continue  to  exist, 
and,  if  the  charter  or  by-laws  should  require  certain  acts  to 
be  done  by  more  than  one  shareholder,  the  sole  owner  may 
transfer  a  portion  of  his  shares  to  other  persons,  so  as  to 
conform  to  the  letter  of  the  rule."  It  has  been  held  that  a 
corporation  which  has  sold  all  its  assets,  with  the  intention 
of  putting  an  end  to  its  business,  whose  officers  had  all  re- 
signed, and  whose  stockholders  had  all  transferred  their 
shares  to  a  single  person,  was,  nevertheless,  not  dissolved, 
and  that  its  existence  could  be  terminated  only  by  judg- 
ment of  forfeiture  or  by  surrender  accepted  by  the  State. 
Russell  V.  McLcUan,  14  Pick.  (Mass.),  69,  70;  Nczvton 
Mfg.  Co.  V.  IVhitc,  42  Ga.,  148;  Baldzvin  v.  Canficld,  26 
Minn.,  43. 

The  dissolution  of  a  business  corporation  is  effected  in 
one  of  the  following  ways:  (i)  by  the  expiration  of  its 
charter;  (2)  by  Act  of  the  Legislature,  where  power  is  re- 
served for  that  purpose,  or  there  is  no  constitutional  inhibi- 
tion; (3)  by  surrender  of  charter  which  is  accepted;  (4) 
by  forfeiture  of  the  franchises  and  judgment  of  dissolution, 
pronounced  by  a  Court  having  jurisdiction.  2  Morawetz, 
Sec.  1004;  Taylor  on  Private  Corporations,  Sec.  430.  It 
is  not  pretended  that  the  Bethel  Hotel  Company  was  dis- 
solved in  either  of  the  ways  indicated.  The  charter  of  the 
corporation  has  not  expired,  neither  has  it  been  repealed  by 
the  Legislature,  or  been  surrendered  to  the  State  by  its 
members  or  stockholders.  It  may  be  true  that  there  was  a 
non-user  of  its  franchises  by  the  corporation  for  a  period 
of  seven  years  or  more,  occasioned  by  the  sale  of  the  only 
property  it  owned  which  could  have  l^een  used  for  hotel 
purposes.  Undoubtedly,  the  non-user  of  its  franchises  by 
a  corporation  is  ground  for  dissolution  and  forfeiture  of 
its  charter,  at  the  instance  of  the  State ;  but  until  sentence 


Ml 


PARKER  V.   BETHEL  HOTEL  CO.         645 

of  dissolution  has  been  pronounced  by  a  Court  of  compe- 
tent jurisdiction,  in  a  proper  proceeding  instituted  for  the 
purpose,  the  corporation  will  continue  to  exist,  notwith- 
standing its  failure  to  use  its  franchises.  And  forfeiture 
can  only  be  decreed  in  a  proceeding  directly  instituted  for 
the  purpose,  by  the  State  granting  it.  Code  (M.  «&  V.  ), 
Sec.  1 712;  State  v.  Butler,  15  Lea,  104,  no;  Jersey  City 
Gaslight  Co.  v.  Coiisiiiners'  Gas  Co.,  40  N.  J.  Eq.,  427; 
Broadzuell  v.  Merritt,  87  Mo.,  95.  Until  dissolution  has 
been  thus  judicially  pronounced,  neither  the  existence  of 
the  corporation  or  its  title  to  its  property  can  be  questioned 
collaterally. 

We  are  bound  to  conclude,  therefore,  that  the  Bethel 
Hotel  Company  was  not  dissolved,  or  its  franchises  extin- 
guished, for  any  of  the  reasons  alleged  by  the  defendants, 
and  that  it  is  now  a  corporation  endued  with  life,  with  au- 
thority to  own  property  and  exercise  all  the  powers  con- 
ferred on  it  by  its  charter. 

Defendants  insist  that  the  alleged  equitable  estate  of 
Lucius  Frierson  in  the  property  of  the  Bethel  Hotel  Com- 
pany, did  not  depend  alone  upon  the  dissolution  of  the  cor- 
poration, but  resulted  also  from  the  fact  that  he  was  the 
sole  owner  of  all  its  capital  stock.  The  proposition  is,  that 
if  one  person  owns  all  the  shares  of  stock  of  a  corporation 
which  owes  no  debts,  he,  in  virtue  of  such  ownership,  be- 
comes the  equitable  owner  of  all  its  property,  or,  at  least, 
may  sell  and  dispose  of  it  by  deed,  if  he  choose  to  do  so. 
This  proposition  is  argued  by  counsel  for  defendant  with 
force  and  ability,  and  is  supported  by  some  authority.  It 
has  found  favor  with  the  Supreme  Court  of  Maryland 
[Swift  V.  Smith,  65  Md.,  428,  433);  but  the  decision  of 
that  learned  Court  is  opposed  by  the  current  of  authority, 
and  seems  to  us  to  overlook  and  ignore  certain  principles 
that  are  fundamental. 

A  corporation  and  its  shareholders  are  distinct  legal 
entities.  In  Keith  v.  Clark,  4  Lea,  718,  this  Court  held 
that,  notwithstanding  the  State  owned  all  the  stock  in  the 
Bank  of  Tennessee,  "the  bank  and  the  State  are  entirely 


646        ALIRXATIOX  OF   [XTERESTS  TN  PROPERTY 

different  legal  entities;"  and  in  Lillard  v.  Porter,  2  Head. 
176,  it  was  said,  "stockholders  are  totally  distinct  from  the 
corporation."  Important  consequences  result  from  this 
rule.  The  shareholders  are  neither  responsible  for  the  debts 
nor  for  the  torts  of  the  corporation.  In  the  absence  of 
special  circumstances,  the  shareholders  cannot  be  parties, 
either  plaintiffs  or  defendants,  in  actions  respecting  cor- 
porate rights,  nor  have  they  any  title  or  direct  interest  in 
the  property  of  the  corporation. 

"Shareholders,"  says  Thompson,  "are  not  joint  tenants 
or  in  any  other  sense  co-owners  of  the  corporate  property, 
either  before  or  after  its  dissolution.  Tlie  title  to  it  rests 
exclusively  in  the  legal  entity  called  the  corporation.  A 
share  of  the  capital  stock  merely  gives  the  right  to  partake, 
according  to  the  amount  put  into  the  fund,  of  the  surplus 
profits  of  the  corporation,  and  ultimately,  on  the  dissolu- 
tion of  it,  of  so  much  of  the  fund  thus  created  as  remains 
unimpaired  and  is  not  liable  for  debts  of  the  corporation." 
Commentaries  on  the  Law  of  Corporations,  Sec.  1071.  As 
the  shareholders  have  no  direct  interest  in  the  corporate 
property,  they  cannot  convey  the  real  estate  of  the  corpora- 
tion, though  all  join  in  the  deed. 

Ill  JVhcdock  V.  MoiiUon,  15  Vt.,  519,  Redfield,  J., 
stated  the  reasons  for  the  rule  in  his  usual  clear  and  accu- 
rate style.  In  that  case.  Moulton  and  Hutchinson,  sole 
proprietors  and  owners  of  all  the  stock  of  a  corporation, 
conveyed  its  real  estate,  in  mortgage,  to  secure  the  repay- 
ment of  money  borrowed  of  the  plaintiff,  Wheelock.  He 
brought  suit  to  enforce  his  mortgage.  Judge  Redfield  said : 
"The  fact  that  the  signers  of  this  deed  owned  the  whole  of 
the  shares  will  make  no  difference  in  regard  to  the  neces- 
sity of  a  vote  of  the  corporation,  in  order  to  convey  the 
land.  The  title  to  the  land  was  in  the  corporation,  not  in 
the  individual  shareholders.  The  deed  of  one,  or  of  any 
number  of  the  stockholders,  will  not  affect  the  title  to  the 
land.  The  share  owners  are  not  tenants  in  common  of  the 
land.  They  have  no  title  whatever  to  any  of  the  property 
of  the  corporation.     It  is  true  that  one  who  owned  all  the 


PARKER  z:   BETHEL  HOTEL  CO.         647 

shares  might  control  the  corporation,  and  so  he  could  if  he 
owned  a  majority  of  the  shares ;  but  he  could,  in  either  case, 
do  it  only  by  a  vote  of  the  corporation,  at  a  meeting  held  in 
strict  accordance  with  the  statutes  of  the  corporation."  ^ 

And  in  Humphreys  v.  McKissick,  140  U.  S.,  304,  Air. 
Justice  Field,  discussing  the  same  question,  said:  "The 
property  of  a  corporation, is  not  subject  to  the  control  of 
individual  members,  whether  acting  separately  or  jointly. 
They  can  neither  incumber  nor  transfer  that  property,  nor 
authorize  others  to  do  so.  The  corporation — the  artificial 
being  created — holds  the  property,  and  alone  can  mortgage 
or  transfer  it,  and  the  corporation  acts  only  through  its  offi- 
cers, subject  to  the  conditions  prescribed  by  law." 

A  very  instructive  case  on  this  question  is  Boldzuin  v. 
Caiificld,  26  Minn.,  43.  The  facts  of  that  case  were  very 
similar  to  those  of  this  case,  and  the  direct  question  now 
under  consideration  was  passed  upon.  The  opinion  of  the 
Court  was  in  accord  with  the  cases  above  cited.  See  also 
Button  V.  Hojfinau,  61   Wis.-,  20.' 

We  are  thus  led,  both  by  reason  and  authority,  to  the 
conclusion  that  Lucius  Frierson,  as  sole  stockholder  of  the 
Bethel  Hotel  Company,  had  no  title,  legal  or  equitable,  to 
its  property.  The  title  to  the  property  was  in  the  Bethel 
Hotel  Company,  and  could  only  be  conveyed  by  it.  The 
conveyance  of  its  real  estate  is  one  of  the  most  solemn  acts 
of  a  corporation,  and  it  can  only  be  done  in  pursuance  of  a 
vote  of  the  corporation,  and  by  deed  executed  in  the  form 
and  mode  prescribed  by  law.  Thompson's  Commentaries 
on  the  Law  of  Corporations,  Sec.  5096.  At  common  law  a 
corporation  could  not  execute  a  deed  to  realty  except  under 
seal;  and  the  general  corporations  Act  of  1875,  under  which 
the  Bethel  Hotel  Company  was  organized,  provides  that,  if 
the  corporation  have  no  seal,  it  shall  l3e  bound  by  the  signa- 
ture of  its  name  by  a  duly  authorized  officer. 

To  have  made  a  valid  conveyance  of  the  real  estate  of 
the  companv,  it  was  necessary,  therefore,  that  the  deed 
shoukl  have  been  executed  in  the  name  of  the  corporation, 
under  seal,  if  it  had  one,  and,  if  not,  its  name  should  have 
been  signed  by  an  agent  duly  authorized  by  its  governing 


648         ALIKXATION  OF  INTERESTS  IN   PROPERTY 

agency,  its  board  of  directors.  Garret f  v.  B dm  out  Land 
Co.,  94  Tenn.,  460.  As  we  have  seen,  nothing  of  this  kind 
was  done.  The  deed  to  defendant,  Webster,  was  executed 
by  Lucius  Frierson,  in  his  own  name,  and  under  his  own 
signature.  The  Bethel  Hotel  Company,  although  it  owned 
the  property,  was  in  no  sense  a  party  to  it.  For  this  and 
other  reasons  given,  the  deed  of  Lucius  Frierson,  convey- 
ing the  real  estate  of  the  Bethel  Hotel  Company  to  defend- 
ant, W.  J.  Webster,  was  void,  and  conveyed  to  him  no  title 
^or  interest  therein. - 


"  In  the  court  below,  the  Chancellor  had  decreed  the  dissolution  of 
the  company.  One  of  the  conclusions  reached  on  this  appeal  being  tliat, 
"He  had  no  power  in  this  case  to  decree  a  dissolution,"  as  that  "could 
be  done  only  by  a  suit  instituted  by  the  State  for  the  purpose,"  the 
cause  was  remanded  for  further  proceedings. 

Compare:  Humplircys  v.  McKlssocti,  140  U.  S.  304,  1891.  (Several 
railroads  combined  to  construct  an  elevator,  to.  be  connected  with  their 
respective  roads.  A  corporation  was  organized  to  erect  the  elevator. 
Each  railroad  received  a  certificate  of  stock  corresponding  to  its  sub- 
scription towards  the  cost.  One  of  the  railroads  mortgaged  "all  its 
property,  rights,  franchises,  real  estate,  tracks,  depots  and  appurtenances 
belonging  thereto."  Held,  that  the  only  interest  of  the  railroad  company 
in  the  elevator  was  as  a  stockholder  in  the  elevator  company  and  that 
the  mortgage  did  not  cover  this  interest.) 

Sellers  V.  Greer,  172  111.  549,  1898.  (All  the  shares  of  the  B  Company 
were  divided  between  A  and  C,  except  that  a  son  of  A  owned  one  share 
and  the  son  of  C  another.  A  and  C  made  a  contract  in  which  A  agreed 
to  convey  to  C  certain  property  of  the  company  and  C  agreed  to  convey 
the  shares  owned  by  him  to  A.  C  brought  a  bill  against  A,  praying  that 
A  might  be  decreed  to  convey  the  property  in  accordance  with  the 
contract.  Held,  that  A  had  no  title  to  the  property  of  the  company  and 
that  any  decree  that  could  be  made  would  be  nugatory.) 

Merchants'  Ad-Sign  Co.  v.  Sterling,  124  Cal.  429,  1899.  (The  Code 
made  every  contract  by  which  any  one  was  restrained  from  carrying  on 
any  kind  of  business  void,  except  that  one  who  sold  a  business  might 
agree  with  the  buyer  to  refrain  from  carrying  on  a  similar  business. 
B  was  a  stockholder  and  general  manager  of  the  C  Company,  a  corpora- 
tion engaged  in  the  advertising  business.  B  transferred  what  he  asserted 
was  all  his  stock  and  also  his  interest  in  the. good-will  of  the  business  of 
C  to  A,  and  agreed  for  a  valuable  consideration  that  he  would  not 
engage  in  the  advertising  business  in  competition  with  the  C  Company 
so  long  as  .A  or  any  one  deriving  title  to  the  good-will  of  the  business 
of  the  C  Company  from  A  should  carry  on  a  like  business.  A  brought 
a  bill  asserting  that  B  was  engaging  in  the  advertising  business  in  viola- 
tion of  this  contract,  and  asking  for  an  injunction.  Demurrer  sustained 
on  the  ground  that  a  stockholder  had  no  interest  in  the  good-will  of  the 
business  carried  on  by  the  corporation  which  he  could  transfer.) 

Home  fire  Insurance  Co.  v.  Barber,  93  N.  W.  1024,  Neb.  1903. 
("Cases  of  this  kind  must  be  differentiated  sharply  from  those  where 
the  proceeding  is  at  Irtw,  or  where  a  question  of  title  to  tlie  corporate 
property  is  involved.  There  is  no  question  that  stockholders,  as  such, 
liave  no  title  to  the  corporate  property  which  they  can  convey  or 
encumber  in  their  own  names.  But  this,  in  substance,  is  only  another 
way  of  saying  that  the  corporation  must  act  through  its  proper  agents 
and  in  the  prescribed  way."    Per  Pound,  C,  p.  1033.) 


CHAPTER  XL 


ALIENATION   OF  THE   SEPARATE   PROP- 
ERTY OF  A  PARTNER    FOR  A 
PARTNERSHIP  DEBT. 


NEWMAN  V.  BAGLEY. 
In  the   Supreme  Judicial  Court   of  Massachusetts, 

1835- 

T)2!  Massachusetts  Reports,  570. 

Assumpsit  :  The  writ  was  dated  January  27,  1834.  By 
the  answer  of  the  trustee  it  appeared,  that  at  the  time  of 
the  service  of  the  writ,  he  was  indebted  to  the  defendant 
in  the  sum  of  $25  » that  on  January  10,  1834,  the  defendant 
and  Levi  Vosburgh,  of  Hillsdale  in  New  York,  as  members 
of  the  late  firm  of  Bagley  and  Vosburgh,  and  the  defendant, 
in  his  individual  capacity,  and  also  as  member  of  the  late 
firm  of  Hinman  &  Bagley,  assigned  to  Nicholas  Hollenbeck 
and  Lewis  Haywood,  who  were  likewise  inhabitants  of 
Hillsdale,  all  the  books  of  account,  notes,  obligations  and 
evidences  of  debt,  belonging  to  the  defendant  or  either  of 
the  two  firms,  with  full  power  to  collect  the  debts  and  de- 
mands, in  trust  to  apply  the  proceeds  thereof,  proportionably 
to  the  indemnification  of  the  assignees  and  certain  other  per- 
sons named,  who  had  become  indorsers  or  sureties  for  the 
defendant  and  the  two  firms;  and  that  on  June  14,  1834, 
notice  of  such  assignment  was  given  to  the  trustee. 

Wilde,  J.,  afterward  delivered  the  opinion  of  the  court. 
The  trustee  in  his  answer  admits  that  he  was  indebted  to  the 
principal,  but  he  discloses  an  assignment  of  this,  and 
other  debts  and  property,  from  Bagley  to  Nicholas  Hollen- 

(649) 


650  SEPARATE  PROPERTY  AND  PARTNERSHIP  DEBTS 

beck  and  Lewis  Haywood,  made  before  the  service  of  the 
plaintiff's  writ ;  and  the  question  is,  whether  this  assignment 
is  vahd,  so  as  to  defeat  the  plaintiff's  attachment  in  this  pro- 
cess. It  has  been  argued,  that  the  assignment  is  good  by  the 
law  of  New  York,  however  it  may  be  considered  here,  and 
that  an  assignment  by  a  foreign  debtor,  which  is  good  by 
the  law  where  he  has  his  domicil,  is  valid  and  will  be  sup- 
ported here.  This  seems  to  be  the  established  rule;  but  we 
consider  this  assignment  valid  by  our  laws,  as  well  as  by  the 

laws  of  New  York;  so  that  this  point  becomes  immaterial. 
*     *     *  1 

But  it  is  objected,  that  a  partner  cannot  assign  his 
separate  property  to  pay  partnership  debts,  so  as  to  avail 
against  the  separate  creditors  of  the  assignor.  This  objec- 
tion, however,  does  not  appear  to  be  well  founded.  It  is 
true,  that  the  creditors  of  an  individual  partner  cannot  attach 
partnership  property  to  the  prejudice  of  partnership  credi- 
tors ;  because  a  partner  has  no  distinct  and  separate  property 
in  the  funds  of  the  partnership,  until  the  debts  of  the  partners 
are  paid;  but  this  reason  fails  in  regard  to  an  assignment 
by  a  partner  of  his  separate  property.  That  is  equally  liable 
to  attachment  by  his  own  creditors,  or  the  creditors  of  the 
firm,  and  an  assignment  to  pay  either  is  good. 

Trustee  discharged.^ 

*  The  Court's  discussion  of  this  question  is  omitted. 

^Compare:  Stezvart  v.  Slater,  6  Duer,  83,  1856.  (A  and  B  were 
partners.  A  gave  a  mortgage  on  certain  of  his  personal  property  to 
C  to  secure  a  debt  due  C  by  the  firm.  A,  subsequently,  gave  D  a  mort- 
gage on  the  same  property  to  secure  an  individual  debt  due  D.  D,  on 
a  complaint  to  foreclose  his,  D's,  mortgage,  claimed  that  his  mortgage 
was  prior  to  Cs  mortgage.  Claim  denied.  Duer,  J. :  "As  each  part- 
ner in  a  firm  is  personally  liable  for  the  payment  of  its  debts,  there  is 
certainly  no  law  that  forbids  him  from  paying,  or  securing  the  pay- 
ment of  the  whole,  or  of  any  portion  of  them,  from  his  own  separate 
property  or  funds ;  and  in  many  cases  to  make  such  payment,  or  give 
such  security,  may  not  only  be  his  right,  but  as  between  him  and  his 
partners  a  positive  duty;  the  debt  or  fund  or  money,  may,  in  respect  to 
tlie  creditor,  be  a  partnership  debt,  and  yet  may  be  one  which,  in 
respect  to  his  partners,  he  is  bound  to  discharge  ;  and,  assuredly,  it  has 
never  been  supposed  that  the  creditor  to  whom  the  payment  is  made 
or  security  given,  is  bound  to  inquire  into  the  accounts  of  the  firm, 
or  that  his  right  to  accept  such  payment,  or  security,  is  at  all  affected 
by  the  insolvency  of  the  partner  from  whom  he  receives  it.") 

Holton  V.  Holton,  40  N.  H.  y7,  i860.     (A  and  B  were  partners.    A 


NEWMAN  V.  BAGLEY  651 

was  indebted  to  E.  C  was  indebted  to  A.  A  and  B  were  indebted  to 
D.  A  directed  C  to  pay  the  money  due  him,  A,  to  D,  and  C  agreed  to 
do  so.  E  secured  a  judgment  against  A  and  attached  the  debt  due  by 
C.  Held,  that  C  must  pay  his,  C's,  debt  to  E.  Fowler,  J. :  "It 
may  be  considered  as  the  well  established  rule  of  law  in  this 
State,  that  the  separate  creditoi  of  a  partner  have  a  preference-  over 
the  separate  estate  of  their  debtor,  for  the  satisfaction  of  their  debts, 
until  it  shall  have  been  actually  and  legally  appropriated  and  applied 
in  payment  of  partnership  debts ;  and  that  any  attempt,  by  sale  or  other- 
wise, with  notice,  to  divert  the  separate  property  or  funds  of  the  indi- 
vidual debtor  from  the  payment  of  his  separate  debts,  to  the  discharge 
of  a  partnership  liability  of  the  firm  of  which  he  may  be  a  member,  is 
in  principle  a  fraud  on  the  rights  of  a  creditor  of  the  individual  debtor, 
and  void  as  to  him," 


652  SEPARATE  PROPERTY  AND  PARTNERSHIP  DEBTS 


MEECH  V.  ALLEN. 
In  the  Court  of  Appeals^  New  York,,  1858. 

17  New   York  Reports,  300. 

Appeal  from  the  Supreme  Court.  The  complaint  aver- 
red these  facts:  In  May,  1847,  ^^^^  plaintiffs  recovered  a 
judgment  against  one  Taylor,  upon  his  sole  and  individual 
indebtedness,  for  $8,650.65,  which  was  duly  docketed  and 
became  a  lien  upon  his  real  estate.  In  1848,  Taylor  died, 
seized  of  real  estate  in  his  own  individual  right,  upon  which 
said  judgment  was  a  lien.  Taylor  and  one  Hiram  Pratt,  who 
died  in  May,  1840,  were,  in  their  lifetime,  partners  in  the 
business  of  common  carriers  upon  the  Erie  canal  and  the 
great  lakes.  A  demand  arose  against  them  as  such  partners 
which  was  in  litigation  when  Pratt  died,  and  upon  which  a 
judgment  was  recovered  in  the  Supreme  Court,  and  duly 
docketed,  on  the  13th  May,  1842,  against  Taylor,  as  survivor 
of  himself  and  Pratt,  for  $9,990.05 ;  which  judgment  was 
assigned  to  and  became  the  property  of  the  defendant  Allen 
after  the  death  of  Taylor  and  the  recovery  of  the  plaintiffs' 
judgment.  In  April,  1850,  executions  were  issued  upon 
both  of  the  above  described  judgments  to  the  sheriff  of  Erie, 
who,  in  virtue  thereof,  on  the  4th  of  June,  1850,  sold  certain 
parcels  of  the  real  estate  in  the  city  of  Buffalo  whereof  Tay- 
lor died  seized  in  his  own  right. 

The  plaintiffs  attended  at  the  sale,  and  gave  notice  to 
the  defendant  of  the  facts  stated,  claiming  that  their  judg- 
ment was  entitled  to  priority,  and  that  the  money  raised  by 
the  sale  should  be  applied  first  to  its  satisfaction.  The  de- 
fendant became  the  purchaser  at  the  sale.  There  is  no  other 
individual  property  of  Taylor  out  of  which  the  plaintiffs  can 
obtain  satisfaction  of  their  judgment  except  the  land  thus 
sold,  and  there  is  sufficient  estate  of  Hiram  Pratt,  deceased, 
to  satisfy  the  judgment  of  the  defendant. 


MEECH  V.  ALLEN  653 

The  complaint  prayed  that  the  land  might  be  resold  and 
the  proceeds  first  applied  to  the  payment  of  the  plaintiffs' 
judgment,  or  that  the  defendant  pay  to  them  so  much  of 
the  proceeds  of  the  sale,  already  had,  as  would  extinguish 
their  judgment,  with  the  costs  of  this  action.  The  defend- 
ant demurred,  and  had  judgment  in  his  favor,  which  was 
on  appeal,  affirmed  by  the  Supreme  Court,  at  general  term 
in  the  eighth  district;  whereupon  the  plaintiffs  appealed  to 
this  court. 

Selden,  J. :  It  is  a  settled  rule  of  equity  that,  as  between 
the  joint  and  separate  creditors  of  partners,  the  partnership 
property  is  to  be  first  applied  to  the  payment  of  the  partner- 
ship debts,  and  the  separate  property  of  the  individual  part- 
ners to  the  payment  of  their  separate  debts;  and  that  neither 
class  of  creditors  can  claim  anything  from  the  fund  which 
belongs  primarily  to  the  opposite  class  until  all  the  claims  of 
the  latter  are  satisfied.  This,  however,  is  a  rule  which  pre- 
vails in  courts  of  equity  in  the  distribution  of  equitable  assets 
only.  Those  courts  have  never  assumed  to  exercise  the 
power  of  setting  aside  or  in  any  way  interfering  with  an 
absolute  right  of  priority  obtained  at  law.  In  regard  to  all 
such  cases,  the  rule  is  equitas  seqidtiir  legem.  ( i  Story  Eq. 
Jur.,  section  553). 

In  Wilder  v.  Keeler  (3  Paige,  171),  Chancellor  Wal- 
worth says :  "Equitable  rules  are  adopted  by  this  court  in 
the  administration  of  legal  assets,  except  so  far  as  the  law 
has  given  an  absolute  preference  to  one  class  of  creditors 
over  another."  So,  in  the  case  of  Avcrill  v.  Loncks  (6  Barb. 
S.  C.  R.,  470),  Paige,  P.  J.,  says:  "Courts  of  equity,  in  the 
administration  of  assets,  follow  the  rules  of  law  in  regard 
to  legal  assets,  and  recognize  and  enforce  all  antecedent  liens, 
claims  and  charges  existing  upon  the  property,  according  to 
their  priorities."  This  is  also  conceded  in  the  case  of  Mc- 
Cidloh  V.  Dashicll  (i  Har.  &  Gil,  96),  where  the  whole 
doctrine  of  the  distribution  in  equity  of  the  joint  and  sepa- 
rate  property   of   partners    is   very   elaborately   examined. 


654  SEPARATE  PROPERTY  AND  PARTNERSHIP  DEBTS 

Archer,  J.,  by  whom  the  opinion  of  the  Court  was  dehvered, 
there  says :  "At  law,  the  joint  creditors  may  pursue  both  the 
joint  and  separate  estate,  to  the  extent  of  each,  for  the  satis- 
faction of  their  joint  demands,  which  are  at  law  considered 
joint  and  several,  without  the  possibility  of  the  interposition 
of  any  restraining  power  of  a  Court  of  equity."  But  es- 
pecially must  it  be  beyond  the  power  of  such  courts  to  inter- 
fere where  an  absolute  right  of  legal  priority  is  given  by 
force  of  a  positive  statute,  as  in  case  of  a  judgment.  Chan- 
cellor Walworth,  in  Mower  v.  Kip  (6  Paige  88),  says  :  "The 
rule  of  this  court  is  to  give  effect  to  the  lien  of  a  judgment 
upon  a  legal  title,  so  far  as  it  can  be  enforced  by  execution 
at  law." 

As  there  is  no  doubt  that  at  law  the  judgment  for  a 
partnership  debt  attaches  and  becomes  a  lien  upon  the  real 
estate  of  each  of  the  partners,  with  the  same  effect  as  if 
such  judgment  were  for  the  separate  debt  of  such  partner 
it  is  obvious  from  the  preceding  authorities,  that  the  theory 
upon  which  the  complaint  in  this  case  was  drawn  is  erro- 
neous. The  principle  that  the  separate  property  of  an  indi- 
vidual partner  is  to  be  first  applied  to  the  payment  of  his 
separate  debts,  has,  as  we  have  seen,  never  been  held  to  give 
priority  as  to  such  property  to  a  subsequent  judgment 
for  an  individual  over  a  prior  judgment  for  a  partner- 
ship debt.  It  is  true,  that  courts  of  equity  will  sometimes 
give  to  a  mere  equitable  lien,  which  is  prior  in  point 
of  time,  a  preference  over  a  subsequent  judgment ;  but 
this  will  be  done  only  where  such  prior  lien  is  specific  in  its 
character,  as  in  the  case  of  White  v.  Carpenter  (2  Paige, 
219).  The  mere  general  equity  of  the  separate  creditors  to 
have  their  debts  first  paid  out  of  the  individual  property  of 
the  partners  does  not  amount  to  a  lien  at  all,  much  less  a 
lien  of  the  kind  necessary  to  give  it  a  preference  over  a 
judgment  for  a  partnership  debt. 

The  plaintiffs  cannot  under  the  averments  in  the  com- 
plaint avail  themselves  of  that  principle  of  equity  which  en- 


MEECH  V.  ALLEN  655 

ables  a  creditor  having  a  lien  upon  one  fund  only,  to  compel 
a  creditor  who  has  a  lien  not  merely  on  the  same  fund,  but 
also  upon  another,  to  resort  first  to  the  latter  to  the  end  that 
both  may  be  paid.  If  the  complaint  had  averred  that  there 
v^as  sufficient  partnership  property  upon  which  the  defend- 
ant's judgment  was  a  lien,  to  satisfy  such  judgment  it  is 
possible  that  under  the  principle  referred  to  the  plaintiffs 
might  have  been  entitled  to  some  relief;  and  in  that  event 
it  would  not  have  been  a  valid  objection  to  the  complaint 
that  it  did  not  ask  for  the  relief  appropriate  to  the  case. 
But  the  averment  in  the  complaint  is  simply  that  there  is 
i5ufficient  estate  of  the  deceased  partner,  Hiram  Pratt,  to 
satisfy  the  defendant's  judgment. 

This  averment  brings  the  case  directly  within  the  doc- 
trine laid  down  by  Lord  Eldon  in  Ex  Parte  Kendall  (17 
Vesey,  520).  He  says:  "If  A  has  a  right  to  go  upon  two 
funds,  and  B  upon  one,  having  both  the  same  debtor,  A 
shall  take  payment  from  that  fund  to  which  he  can  resort 
exclusively,  that  by  those  means  of  distribution  both  may 
be  paid.  That  takes  place  where  both  are  creditors  of  the 
same  person,  and  have  demands  against  funds  the  property 
of  the  same  person.  But  it  was  never  said  that  if  I  have  a 
demand  against  A  &  B,  a  creditor  of  B  shall  compel  me  to 
go  against  A  without  more,  as  if  B  himself  could  insist  that 
A  ought  to  pay  in  the  first  instance  as  in  the  ordinar\'  case 
of  drawer  and  acceptor,  or  principal  and  surety,  to  the  intent 
that  all  obligations  arising  out  of  these  complicated  relations 
may  be  satisfied.  But  if  I  have  a  demand  against  both,  the 
creditors  of  B  have  no  right  to  compel  me  to  seek  payment 
from  A,  if  not  founded  in  some  equfty  giving  to  B  the  right 
for  his  own  sake  to  compel  me  to  seek  payment  from  A." 

The  point  has  also  been  expressly  decided  in  this  State 
in  the  case  of  Dorr  v.  Shaw  (4  John.  Ch.  R..  17).  The  only 
difference  in  principle  between  that  case  and  this  is  that  there 
it  did  not  appear  that  the  joint  debtors  were  partners.  This 
however  is  a  difference  which  operates  against  the  claim  of 
the  plaintiffs  here.     Where  two  individuals  not  partners  are 


656  SEPARATE  PROPERTY  AND  PARTNERSHIP  DEBTS 

jointly  indebted  it  might  seem  to  be  just  to  presume  that 
each  owed  one-half  the  debt,  and  to  that  extent  therefore 
there  might  be  an  equity  in  favor  of  the  one  owing  an  indi- 
vidual debt  to  have  so  much  of  the  joint  debt  paid  by  his 
co-debtor.  But  in  regard  to  partners  it  is  now  well  settled 
upon  an  analogous  question,  that  no  such  presumption  can 
be  indulged.  Formerly  a  judgment  creditor  of  one  of  two 
partners  might  levy  his  execution  upon  property  belonging 
to  the  firm,  and,  upon  the  presumption  that  the  interests  of 
the  partners  were  equal,  might  proceed  to  sell  and  appropri- 
ate one-half  the  avails  to  the  satisfaction  of  his  debt.  This 
however  was  long  since  over-ruled. 

In  the  case  of  Diitton  v.  Morrison  (17  Vesey,  193), 
Lord  Eldon,  in  discussing  this  question,  says :  "It  may  be 
represented  that  the  world  cannot  know  what  is  the  distinct 
interest  of  each  [i.  c,  each  partner),  and  therefore  it  is  bet- 
ter that  the  apparent  interest  of  each  should  be  considered 
as  his  actual  interest.  But  courts  of  equity  have  long  held 
otherwise."  He  then  lays  down  the  rule  ever  since  acted 
upon,  that  the  creditor  in  such  a  case  must  wait  until  the 
partnership  accounts  are  settled  before  he  can  claim  anything 
from  the  partnership  property. 

The  principle  here  asserted  by  Lord  Eldon  is  directly 
applicable  to  the  present  case.  It  is,  that  no  inference  can 
be  safely  drawn  from  the  mere  external  relations  of  partners 
to  the  world  as  to  the  situation  of  their  affairs  inter  se,  and 
that  in  all  judicial  proceedings  involving  the  latter  an  inves- 
tigation is  first  to  be  made ;  and  such  is  the  variety  and  fre- 
quent complexity  of  partnership  dealings  that  any  other 
rule  would  obviously  lead  to  gross  injustice.  It  is  impossible 
therefore  in  this  case  to  assume,  without  any  averments  on 
the  subject  in  the  complaint  that  the  estate  of  the  deceased 
partner  Pratt  ought,  in  equity,  to  pay  any  portion  of  the 
defendant's  judgment.  Hence,  upon  the  principles  laid 
down  by  Lord  Eldon,  and  universally  acted  upon  by  courts 
of  equity,  the  complaint  is  clearly  insufficient. 


J 


MEECH  V.  ALLEN  657 

The  judgment  of  the  Supreme  Court  therefore  should 
be  affirmed  with  costs. 

All  the  judges  concurring, 
Judgment  affirmed.^ 

^Accord:  Allen  v.  Wells,  22  Pick.  450,  1838;  Cleghom  v.  Insurance 
Bank,  9  Ga.  319,  1851 ;  Baker  v.  IVimpee,  19  Ga.  87,  1855;  Cummings's 
App.,  25  Pa.  268,  1855 ;  Kuhne  v.  Law,  14  Rich.  18,  1866 ;  Stevens  v. 
Perry,  113  Mass.  380,  1873.  (A  and  B  were  partners.  C  was  indebted 
to  A.  D,  a  firm  creditor,  secured  a  judgment  and  attached  the  debt 
due  A.  E,  a  separate  judgment  creditor  of  A's,  subsequently  attached 
the  same  debt.  In  an  action  at  law,  Held,  that  D's  lien  on  C's  obliga- 
tion to  pay  A  was  superior  to  E's  lien.) 

Contra:  Javis  v.  Brooks,  23  N.  H.  136,  1851.  (A  and  B  were 
partners.  As  part  of  their  separate  property  they  held  an  undivided  two- 
thirds  interest  as  tenants  in  common  in  certain  land.  A  firm  creditor 
obtained  a  judgment  and  attached  this  interest.  Subsequently  a  separate 
though  joint  creditor  of  A  and  B  secured  a  judgment  and  attached  the 
interest  of  A  and  B  in  the  land.  Held,  that,  as  in  New  Hampshire 
under  the  decision  of  Person  v.  Monroe,  i  Foster's  Rep.  462,  the  right 
of  the  firm  creditors  to  priority  on  firm  assets  "has  not  been  put  on 
the  ground  of  a  lien  among  the  partners,  but  is  asserted  as  a  legal  right 
of  the  creditor,"  "principle,  consistency  and  equal  justice  to  the  separate 
creditors"  would  seem  to  require  that  they  should  have  priority  on 
separate  assets.  Accord:  Crockett  v.  Crain,  33  N.  H.  542,  1856.  Even 
in  New  Hampshire,  however,  when  the  partnership  creditor  has  once 
appropriated  the  separate  property  of  the  partner  to  the  payment  of 
the  partnership  debt,  the  property  is  no  longer  subject  to  levy  at  the 
suit  of  the  separate  creditor.    Bower  v.  Smith,  48  N.  H.  iii,  1868.) 


658  SEPARATE  PROPERTY  AND  PARTNERSHIP  DEBTS 


WISHAM  7'.  LIPPINCOTT. 

In  the  Court  of  Chancery,  New  Jersey,  Before  Chan- 
cellor Williamson^  i853- 

9  New  Jersey  Equity,  353. 

William  Wisham  was  a  member  of  a  partnership.  John 
Winship  recovered  a  judgment  against  the  firm,  and  caused 
a  levy  to  be  made  on  the  separate  real  estate  of  Wisham. 
Jacob  S.  Kay,  a  separate  creditor  of  Wisham,  brought  a  bill 
in  Chancery,  alleging  that  the  firm  property,  also  levied  on 
by  Winship,  was  sufficient  to  satisfy  his  judgment.  The 
prayer  of  the  bill  was  that  the  sheriff  be  restrained  from 
making  a  sale  of  the  separate  real  estate  of  Wisham.  On 
the  filing  of  the  bill,  an  injunction,  in  accordance  with  the 
prayer,  was  issued,  the  case  was  heard  on  a  motion  to  dis- 
solve this  injunction.^ 

The  Chancellor  :  As  to  the  rights  of  the  complain- 
ant, Kay,  who  is  a  separate  creditor  of  Wisham.  It  is  in- 
sisted, that  he  is  entitled  to  be  first  paid  out  of  the  effects 
of  his  debtor,  before  the  joint  creditor  of  the  firm  can  claim 
anything.  This  would  seem  to  be  in  conformity  to  the  prin- 
ciple stated  in  i  Story,  section  675,  that  "the  separate  credit- 
ors of  each  partner  are  entitled  to  be  first  paid  out  of  the 
separate  effects  of  their  debtor,  before  the  partnership  credit- 
ors can  claim  any  thing."  But  this  principle  cannot  apply  to 
creditors  who  have  secured  their  debts  by  judgment  and  exe- 
cution liens,  and  occupying  the  relative  position  of  the 
parties  in  this  suit.  If  so,  it  utterly  annuls  and  destroys  the 
principle  before  stated,  that  every  partnership  debt  is  joint 
and  several.  I  doubt  very  much  its  correctness,  as  a  general 
rule.  A  Court  of  Chancery  may,  undoubtedly,  where  the 
equities  between  the  partners  are  to  be  adjusted,  and  where 

^  The  facts  are  restated.  Others,  not  separate  creditors  of  Wisham, 
joined  in  the  bill,  but  only  that  part  of  the  opinion  which  relates  to  the 
claim  of  Kay  being  repri..  d,  any  statement  of  the  facts  on  which  the 
other  plaintiffs  based  their  contentions  is  unnecessary. 


WISHAM  V.  LIPPINCOTT  659 

the  assets  are  before  the  court,  and  the  court  called  upon  to 
marshal  them,  apply  such  a  rule.  Story,  section  676,  note  i, 
says,  "If  the  true  doctrine  be,  that  a  partnership  contract  is 
several,  as  well  as  joint,  then  there  seems  no  ground  to  make 
any  difference  whatsoever  in  any  case  between  joint  and 
several  creditors,  as  to  payment  out  of  joint  or  separate 
assets."  He  adds,  "This  is  now  the  established  doctrine." 
I  have  no  hesitation  in  saying,  that  when  a  joint  creditor  of 
the  firm  has  a  judgment,  and  execution  levied  upon  the  sepa- 
rate effects  of  one  of  the  partners,  this  court  ought  not,  in 
mere  compliance  with  any  such  rule,  as  that  the  separate 
creditors  of  each  partner  are  entitled  to  be  first  paid  out  of 
the  separate  effects  of  one  of  their  debtors  before  the 
partnership  creditors  can  claim  anything,  interfere  with 
such  execution,  either  on  the  application  of  any  one  of  the 
partners,  or  any  creditor  of  the  firm,  or  separate  creditor  of 
any  of  its  members. 

As  I  have  remarked  already,  there  is,  in  this  case,  some- 
thing besides  the  application  of  such  a  rule,  entitling  the 
complainants  to  the  interference  of  the  court. 

The  motion    to  dissolve  is  denied.- 


'Compare:  Straus  v.  Kcrngood,  21  Grat.  584,  1871 :  ("K  recovers 
a  judgment  against  F  &  H  as  partners,  and  sues  out  an  execution  of 
fi.  fa.  upon  it,  which  is  returned  'no  effects.'  Afterwards  S  recovers 
a  judgment  against  H  for  an  individual  debt  of  H.  There  are  no 
assets  of  the  partnership  of  F  &  H,  but  G  is  indebted  to  H.  K  sum- 
mons G  as  garnishee  and  obtains  a  judgment  for  the  amount  of  his 
debt  against  E.  S  also  summons  G  and  obtains  a  judgment;  the  sum- 
mons of  S  being  after  that  of  K,  but  he  obtains  his  judgment  first.  S 
then  files  his  bill  to  enjoin  K  from  receiving  and  G  from  paying  to  K 
the  debt  of  E  to  H.  Held,  K  having  first  recovered  his  judgment 
against  F  &  H  and  sued  out  execution  thereon,  has  the  prior  lien  upon 
the  debt  due  from  E  to  H ;  and  a  court  of  equity  cannot  deprive  him 
of  it") 

Barrett  v.  Furnish,  21  Ore.  17,  1891.  (A  and  B  were  partners.  C. 
a  firm  creditor,  secured  a  judgment  and  docketed  a  lien  on  the  real 
property  of  A.  The  administrator  of  A  brought  a  bill  against  C  to 
restrain  a  sale  under  C's  judgment,  on  the  ground  that  A  had  many 
separate  creditors ;  that  his  estate  would  be  insufficient  to  meet  such 
creditors  unless  C  was  restrained,  and  that  B  had  real  estate  on  which 
C  might  levy.    C's  demurrer  sustained.) 


C60  SEPARATE  PROPERTY  AND  PARTNERSHIP  DEBTS 


In  re  SANDUSKY. 
Register's  Decision^  1878. 

17  National  Bankruptcy  Register,  452. 

Abraham  Sandusky  was  a  member  of  the  firm  of  H. 
Sandford  &  Co.  On  August,  1876,  certain  firm  creditors 
having  secured  a  judgment  levied  on  the  individual  property 
of  Sandusky.  In  February,  1876,  the  firm  became  bankrupt. 
On  a  petition  brought  by  the  assignee  in  bankruptcy,  a  sepa- 
rate creditor  of  Sandusky,  and  Sandusky,  an  injunction  was 
issued  restraining  the  execution  creditors  from  enforcing 
their  lien.^ 

W.  N.  Branson,  Register  in  Bankruptcy. 

The  petitioners  seek  to  maintain  their  injunction  upon 
the  familiar  rule  obtaining  in  equity  and  in  bankruptcy,  that 
the  separate  estate  of  an  individual  partner  cannot  be  applied 
towards  payment  of  the  partnership  debts  until  after  the  pay- 
ment in  full  of  his  separate  debts.  The  respondents,  on  the 
other  hand,  contend  that  the  above  rule  does  not  obtain  in 
this  case,  for  the  reason  that  they  had  obtained  a  specific  lien 
on  the  property  in  question,  by  virtue  of  the  levy  of  an  execu- 
tion thereon. 

I  have  hunted  up  and  examined  the  authorities  on  the 
question  thus  presented,  with  such  care  as  my  time  would 
permit.  The  only  case  in  a  court  of  the  United  States  which 
I  have  found  in  point  is  the  case  In  re  Lewis  (8  N.  B.  R., 
546),  decided  by  Judge  Rives,  of  the  U.  S.  District  Court 
for  Western  District  of  Virginia,  and  affirmed  on  appeal  by 
Judge  Bond,  of  the  Circuit  Court.  In  that  case  the  court 
holds  that  although,  in  the  distribution  of  the  general  assets 
of-  a  bankrupt,  the  partnership  assets  are  to  be  first  applied 
to  the  partnership  debts,  and  the  individual  assets  of  any 

*  The  facts  are  re-stated  and  that  part  of  the  Register's  opinion  in 
which  he  states  the  facts  omitted. 


IN  RE  SANDUSKY  661 

separate  partner  first  applied  to  his  individual  debts,  accord- 
ing to  the  terms  of  the  Bankrupt  Law,  yet,  when  a  judgment 
has  been  obtained  by  a  partnership  creditor  against  the  mem- 
bers of  a  concern,  such  judgment  operates  as  a  several  4ien 
against  the  real  estate  of  each  partner;  and  if  prior  in  point 
of  time  to  a  judgment  obtained  against  an  individual  partner 
by  an  individual  creditor  of  such  partner,  is  to  be  preferred 
to  such  subsequent  judgment;  but  the  court  is  further  of  the 
opinion  that  when  such  partnership  creditor  can  get  satis- 
faction of  any  part  of  said  judgment  out  of  the  partnership 
assets,  the  pro  ?'ata  distribution  to  which  such  partnership 
creditor  is  entitled  out  of  the  partnership  fund  shall  first  be 
applied  as  a  credit  on  said  judgment  against  the  separate 
partner,  in  relief  of  the  fund  of  such  separate  partner,  for  the 
benefit  of  the  separate  creditor. 

In  the  case  of  Mccch  v.  Allen  (17  N.  Y.,  300),  the  New 
York  Court  of  Appeals  say  this :  It  is  a  settled  rule  of  equity 
that,  as  between  the  joint  and  separate  creditors  of  partners, 
the  partnership  property  is  to  be  first  applied  to  the  payment 
of  the  partnership  debts,  and  the  separate  property  of  the  in- 
dividual partners  to  the  payment  of  their  separate  debts,  and 
that  neither  class  of  creditors  can  claim  anything  from  the 
fund  which  belongs  primarily  to  the  opposite  class  until  all 
the  claims  of  the  latter  are  satisfied.  This,  however,  is  a 
rule  which  prevails  in  a  court  of  equity  in  the  distribution 
of  equitable  assets  only.  Those  courts  have  never  assumed 
to  exercise  the  power  of  setting  aside,  or  in  any  wav  interfer- 
ing with  an  absolute  right  of  priority  obtained  at  law.  In 
regard  to  all  such  cases,  the  rule  is  equitas  scqiiitiir  legem. 
(i  Story  Eq.  Jur.,  Sec.  553.) 

In  Wilder  v.  Keeler  (3  Paige,  167),  Chancellor  Wal- 
worth says :  "Equitable  rules  are  adopted  by  this  court  in 
the  administration  of  legal  assets,  except  so  far  as  the  law 
has  given  an  absolute  preference  to  one  class  of  creditors 
over  another."  So  in  the  case  of  Averill  v.  Loucks  (6  Barb., 
470),  Paige,  Justice,  says:  "Courts  of  equity,  in  the  admin- 
istration of  assets,  follow  the  rules  of  law  in  regard  to  legal 


662  SEPARATE  PROPERTY  AND  PARTNERSHIP  DEBTS 

assets,  and  recognize  and  enforce  all  antecedent  liens,  claims 
and  charges,  existing  upon  the  property,  according  to  their 
priorities."  This  is  also  conceded  in  the  case  of  McCulloiigh 
V.  Dashiell  (i  Har.  &  Gil.,  96),  where  the  whole  doctrine  of 
distribution  in  equity  of  the  joint  and  separate  property 
of  partners  is  very  elaborately  examined.  Archer,  J.,  says: 
"At  law  the  joint  creditors  may  pursue  both  the  joint  and 
separate  estate  to  the  extent  of  each  for  the  satisfaction  of 
their  joint  demands,  which  are  at  law  considered  joint  and 
several  without  the  possiblity  of  the  interposition  of  any 
restraining  power  of  a  court  of  equity."  But  especially  must 
it  be  beyond  the  power  of  such  courts  to  interfere  where 
an  absolute  right  of  legal  priority  is  given  by  force  of  a 
positive  statute,  as  in  case  of  a  judgment.  Chancellor  Wal- 
worth, in  Mower  v.  Kip  (6  Paige,  88),  says:  "The  rule  of 
this  court  is  to  give  effect  to  the  lien  of  a  judgment  upon  a 
legal  title  so  far  as  it  can  be  enforced  by  execution  at  law." 

I  have  thus  quoted  at  large  from  the  opinion  of  the 
N.  Y.  Court  of  Appeals,  as  it  is  a  court  of  high  authority. 
To  the  same  effect  is  Straus  v.  Kerngood  (21  Graft.,  584). 
In  New  Jersey  it  is  held  that  the  equitable  principle  above  re- 
ferred to  cannot  apply  to  creditors  who  have  secured  their 
debts  by  judgment  and  execution  liens,  i  Stock,  (N.  J.), 
836.  The  Supreme  Court  of  Georgia  hold  that  in  cases  of 
co-partnership,  the  equity  in  favor  of  separate  creditors  will 
not  be  enforced  to  control  or  take  away  a  right  acquired  by 
legal  execution  on  the  part  of  joint  creditors  against  the 
separate  estate.  {Baker  v.  Wimpce,  19  Ga.,  87;  Cleghorn  v, 
Ins.  Bank,  9  Ga.,  319.) 

In  the  latter  case,  Lumpkin,  J.,  delivering  the  opinion 
of  the  court,  says :  "The  equity  in  favor  of  separate  credit' 
ors  will  never  be  enforced  to  control  or  take  away  a  right 
acquired  by  legal  execution  on  the  part  of  joint  creditors 
against  the  separate  estate." 

In  Wisham  v.  Lippincott  (i  Stock.,  353),  Chancellor 
Williamson  says :  "A  Court  of  Chancery  may  undoubtedly, 
where  the  equities  between  the  parties  are  to  be  adjusted 


IN  RE  SANDUSKY  663 

and  when  the  assets  are  before  the  court,  and  the  court  is 
called  upon  to  marshal  them,  apply  such  a  rule.  I  have  no 
hesitation  in  saying  that  when  a  joint  creditor  of  a  firm 
has  a  judgment  and  execution  levied  upon  the  separate 
effects  of  one  of  the  partners,  this  court  ought  not,  in  mere 
compliance  with  any  such  rule  as  that  the  separate  creditors 
of  each  partner  are  entitled  to  be  first  paid  out  of  the  sepa- 
rate effects  of  their  debtors,  before  the  partnership  creditors 
can  claim  anything,  to  interfere  with  such  execution,  either 
on  application  of  one  of  the  partners  or  any  creditor  of  the 
firm,  or  separate  creditor  of  any  of  its  members." 

Some  cases  in  New  Hampshire  would  seem  to  announce 
the  contrary  principle,  as  Crockett  v.  Grain  (33  N.  H.,  542)  ; 
Jarvis  v.  Brooks  {2t^  N.  H.  (Fest. ),  136), and  Holton  v.  Hol- 
ton  (40  N.  H.,  yy).  But  these  cases  must  be  considered  in 
connection  with  a  late  decision  of  the  same  court  {Bowker 
V.  Smith,  48  N.  H.,  11 1),  which  appears  to  modify  the  doc- 
trine announced  in  the  earlier  cases.  In  the  latter  case,  Chief 
Justice  Perley,  in  giving  the  opinion  of  the  court,  and  speak- 
ing of  the  equitable  doctrine  relied  on  by  the  petitioner  in 
this  case,  says :  "The  grounds  on  which  the  doctrine  was  ad- 
mitted here  afforded  no  reason  for  supposing  that  this  right 
remains  to  be  asserted  after  the  property,  once  taken  for  the 
satisfaction  of  debts,  has  been  finally  appropriated  under 
legal  process  by  levy  on  the  property  of  the  individual  part- 
ner." The  Supreme  Court  of  South  Carolina  holds  that  the 
private  creditors  of  a  partner  are  entitled  to  pay  out  of  his 
separate  estate,  in  preference  to  partnership  creditors,  though 
the  latter  have  recovered  judgment  against  him  as  surviving 
partner.     {Woddrup  v.  Ward,  3  Des.,  203.) 

Upon  consideration  of  all  the  authorities  upon  this 
point,  which  I  have  been  able  to  find,  it  appears  to  me  that 
there  is  a  very  decided  preponderance  to  the  effect  that 
where  an  execution  lien  has  been  obtained,  in  good  faith,  be- 
fore bankruptcy,  on  the  individual  property  of  a  member  of 
a  partnership  firm,  under  a  judgment  against  the  firm,  that 
that  statutory  lien  will  not  yield  to  the  equities  of  the  sepa- 


664  SEPARATE  PROPERTY  AND  PARTNERSHIP  DEBTS 

rate  creditors  of  that  partner.  And  this  is  entirely  in  har- 
mony with  the  rule  which  obtains  in  Courts  of  Bankruptcy, 
that  liens  generally,  including  execution  liens,  which  have 
been  acquired  in  good  faith  before  the  commencement  of 
proceedings  in  bankruptcy,  are  preserved  and  enforced. 

I  am  therefore  of  opinion,  upon  the  papers  submitted 
to  me  in  this  matter,  that  the  injunction  should  be  dissolved. 
All  of  which  is  respectfully  submitted. 

Treat_,  J. — Decision  of  register  affirmed.^ 

"Under  section  d"],  sub-section  f,  of  the  Bankruptcy  Act  of  1898, 
all  liens  obtained  through  legal  proceedings  within  four  months  prior 
to  the  filing  of  the  petition  in  bankruptcy,  where  the  person  was  in- 
solvent at  the  time  tlie  lien  was  obtained,  are  dissolved.  See  also  sub- 
section c  and  the  remarks  of  Collier  on  these  sections  in  his  work  on 
Bankruptcy  (Edition  of  1907),  pages  782-785.  The  distribution  of  the 
proceeds  of  the  partnership  property  first  to  the  joint  creditors,  and 
the  separate  property  of  each  partner  first  to  the  creditors  of  that 
partner,  is  the  same  under  the  present  Act,  see  section  5,  sub-section  f, 
page  ,  infra,  as  it  was  under  the  Act  of  1867,  section  36,  and  under 
the  Act  of  1841,  section 

In  Averill  v.  Loiicks,  6  Barb.  470,  1849,  478,  Paige,  P.  J.,  regards 
a  partner  who  has  given  a  mortgage  on  his  separate  property  as  one 
who  guarantees  a  firm  debt  and  therefore  entitled  to  the  rights  of  a 
guarantor.  If  the  firm  fails  he  has  a  right  to  insist  that  the  property  of 
the  principal  debtor  of  the  firm  be  first  used  to  pay  the  debt,  and  if  his 
property  is  taken  to  satisfy  the  debt  he  has  a  right  to  be  subrogated 
to  the  rights  of  the  firm  creditor  against  the  firm.  The  separate 
creditors  of  the  partner  have  the  same  rights  as  their  debtor.  It  is 
suggested  that  the  student  compare  the  assumption  on  which  these  con- 
clusions depend  with  cases  pages  714-726,  infra. 


CHAPTER  XII 


MARSHALLING  ASSETS  IN  PARTNERSHIP 

CASES. 


CRAVEN  V.  KNIGHT. 

In  the  High  Court  of  Chancery^  Before  Lord  Keeper 
NoRTH^  1682. 

Gooding's  Bankruptcy,   187. 

The  bill  sets  forth  that  the  defendant,  George 
Widdows  being  indebted  to  the  plaintiffs,  became  bound 
to  them  in  several  bonds ;  and  the  said  Widdows, 
and  the  defendant  Berman  for  several  years  past, 
were  copartners,  and  Widdows  by  articles  of  copartnership 
was  entitled  to  two-thirds  of  the  whole  stock,  and  the  de- 
fendant Berman  to  one  third  part;  the  said  Widdows  and 
Berman,  25  August  last,  became  bankrupts,  and  a  Commis- 
sion of  Bankruptcy  was  awarded  against  them;  the  Com- 
missioners of  Bankrupts  assigned  all  the  estate  of  the  said 
bankrupts  to  the  defendant  Knight  and  others,  and  refused 
to  let  the  plaintiff's  creditors  of  the  bankrupts  to  come  in, 
and  intend  to  divide  the  said  estate  amongst  the  joint  credit- 
ors of  both  the  bankrupts,  by  reason  whereof  the  plaintiff's 
debts  will  be  utterly  lost. 

The  defendants  insist  that  it  was  agreed  by  indenture  of 
copartnership  that  all  such  debts  as  should  be  owing  on  the 
joint  account  should  be  paid  out  of  the  joint  stock;  and  at 
the  end  of  the  partnership  each  copartner  take  and  receive  to 
his  own  use  his  share  of  the  joint  stock,  and  that  the  joint 
stock  or  trade  should  not  be  charged  with  the  private  or 
particular  debts  of  either  of  the  partners,  but  that  each 
should  pay  their  private  debts  out  of  their  particular  estates, 

(66s) 


666  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

not  included  in  the  joint  stock :  That  if  both  the  said  parties 
should  be  living  at  the  end  of  the  first  three  years  of  the  six 
years  that  the  said  Berman  should  come  in  joint  partner  ac- 
cordingly; and  during  the  said  joint  trade,  the  copartners  be- 
came jointly  indebted  to  the  other  defendants,  Knight,  etc., 
in  6000/,  and  that  Widdows  became  indebted  to  the  plain- 
tiffs, as  aforesaid,  without  the  consent  of  Berman;  and  the 
money  due  upon  the  said  bonds  was  not  brought  into  the 
account  of  the  joint  stock ;  and  the  said  Widdows  was  only  a 
surety,  and  received  none  of  the  money;  and  the  defendants 
insisted  that  the  joint  creditors  ought  to  be  first  paid  out 
of  the  estate  of  partnership;  and  that  the  commissioners 
have  no  power  to  grant  the  joint  estate  to  pay  the  plaintiffs, 
they  being  separate  creditors  of  Widdows:  And  if  a  surplus 
of  the  joint  estate,  after  the  joint  creditors  paid,  then  the 
plaintiffs  can  have  but  a  joint  moiety  of  such  surplus,  to- 
wards their  satisfaction,  the  said  Berman's  moiety  being  not 
liable  to  pay  the  said  Widdows  his  separate  debts;  and  the 
debts  then  claimed  were  the  proper  debts  of  the  said  Wid- 
dows; and  yet  after  all  the  joint  debts  are  paid,  there  will 
be  an  over-plus;  so  that  thereby  the  said  Berman  will  be 
discharged,  and  have  money  paid  unto  him :  But  if  the 
plaintiff  and  other  separate  creditors  of  Widdows  be  ad- 
mitted to  the  joint  estate,  there  will  not  be  sufficient  to  pay 
the  joint  creditors ;  so  that  thereby  not  only  Berman's  estate 
will  be  applied  to  pay  Widdows'  debts,  but  will  be  liable  to 
the  joint  creditors.  But  there  can  be  no  division  of  the 
joint  estate  whereby  to  charge  any  part  thereof  with  the 
private  debts  of  either  party;  and  till  the  joint  debts 
are  paid,  and  till  division  made  of  the  surplus,  both 
parties  are  alike  interested  in  every  part  of  the  said 
joint  stock;  that  the  commissioners  have  no  power 
by  the  commission  to  administer  an  oath  to  the  plaintiffs 
for  proof  of  their  debts,  they  claiming  debts  from  the  said 
Widdows  only ;  and  the  commission  is  against  Widdows 
and  Berman  jointly,  and  not  severally,  and  therefore  cannot 
admit  the  plaintiff's  creditors. 


CRAVEN  z:  KNIGHT  667 

The  Court  declared,  that  the  estate  belonging  to  the 
joint  trade,  as  also  the  debts  due  from  the  same,  ought  to 
be  divided  into  moieties,  and  that  each  moiety  of  the  estate 
ought  to  be  charged  in  the  first  place  with  a  moiety  of  the 
said  joint  debts,  and  if  there  be  enough  to  pay  all  the  -debts 
belonging  to  the,  joint  trade,  with  an  over-plus,  then  such 
over-plus  ought  to  be  applied  to  pay  the  particular  debts  of 
each  partner;  but  if  sufficient  shall  not  appear  to  pay  all  the 

joint  debts;  and  if  either  of  the  said  partners  shall  pay  more 
than  a  moiety  of  the  said  joint  debts,  then  such  partner  is 
to  come  in  before  the  said  commissioners,  and  to  be  admitted 
as  a  creditor,  for  what  he  shall  so  pay  over  and  above  the 
moiety;  and  was  decreed  accordingly.^ 


^Christian  in  his  "Bankruptcy  Law,"  1814,  vol.  2,  p.  244,  says:  "If 
the  joint  estate  is  divided,  and  the  joint  debts  are  divided,  one  cannot 
see  how  the  excess  can  exist  more  on  one  side  than  on  the  other." 

The  report  of  this  case  in  2  Chan.  Cas.  139,  sub.  nom.,  Craven  v. 
Widdoivs,  is  as  follows : 

"Two  partners  in  trade  put  in  each  an  equal  stock,  and  agreed  by 
covenant  that  the  stock  should  pay  the  debts  of  the  stock,  and  neither 
of  their  separate  debts  should  charge  the  stock,  but  only  his  own  estate, 
or  to  that  effect ;  they  both  became  bankrupts,  and  a  commission  against 
them  both,  one  of  them  owed  separately  more  than  the  other.  The 
question  was  between  separate  creditors  of  each  bankrupt,  and  the 
creditors  on  account  of  the  joint  stock,  for  these  would  exclude  the 
separate  creditors  to  charge  the  joint  stock,  but  that  it  should  satisfy 
the  stock  debts.  But  the  opinion  of  the  Lord  North,  contra.  For  the 
covenant  of  the  partners  cannot  bind  any  of  their  creditors,  but  only 
themselves.  Quccrc.  How  the  separate  creditors  could  have  other  title 
than  those  under  whom  they  claim." 

Richardson  v.  Gooding,  2  Vern.  294,  1693 :  (A  and  B  were  partners. 
At  the  instance  of  the  separate  creditors  of  A  a  commission  was  taken 
out  against  A  and  the  commissioners,  for  some  reason  unknown,  as- 
signed to  the  assignees  in  bankruptcy  the  firm  property.  Bill  by  a  firm 
creditor  against  t  e  assignees  for  an  account,  and  that  the  firm  creditors 
should  first  be  paid  out  of  partnership  stock.  Decreed  for  the  plaintiff. 
Accord:  Dusfrcsnay  v.  Prevost,  2  Eq.  Cas.  Abr.  no,  1734.) 

"Statutes  of  bankruptcy  are  of  considerable  antiquity  in  England, 
the  first  having  been  passed  in  the  reign  of  Henry  VIII.  The  bank- 
rupt law  of  the  present  day  descends  from  statutes  passed  in  the 
reigns  of  Elizabeth  and  of  James  I.,  which  have  been  frequently 
amended  from  that  time  to  this.  Previous  to  the  year  1822  these 
statutes  contained  but  a  single  mention  of  bankrupt  partners  or  part- 
nerships, viz.,  that  contained  in  St.  10  Anne,  c.  15.  §  3,  which  provided 
that  the  discharge  of  a  bankrupt  should  not  discharge  a  bankrupt  part- 
ner or  co-obligor.  Before  1822,  therefore,  the  rules  regulating  the 
distribution  in  bankruptcy  of  the  joint  and  separate  estates  of  partners 
were  established  altogether  by  judicial  decision."  Per  Lowell,  J.,  in  re 
Wilcox,  94  Fed.  Rep.  84,  1899,  p.  85. 


668  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 


Ex  Parte  CROWDER. 
In  the  High  Court  of  Chancery^  Before  Lord  Cowper^ 

1715- 
2  Vernon's  Reports,  706. 

A  AND  B  being  joint  traders,  a  commission  of  bank- 
ruptcy issued  against  them;  their  separate  creditors  now 
appHed  by  petition,  that  they  might  be  let  in  for  their  debts 
upon  the  respective  separate  estates  of  the  bankrupts,  under 
that  joint  commission;  the  separate  estates  being  of  small 
value,  and  would  not  bear  the  charge  of  taking  out  two 
new  commissions  against  them  separately. 

The  Lord  Chancellor  ordered  them  to  be  let  in  to  prove 
their  respective  separate  debts  upon  the  joint  commission, 
they  paying  contribution  to  the  charge  of  it,  and  directed 
that  as  the  joint  or  partnership  estate  was  in  the  first  place 
to  be  applied  to  pay  the  joint  or  partnership  debts ;  so  in  like 
manner  the  separate  estate  should  be  in  the  first  place  to  pay 
all  the  separate  debts;  and  as  separate  creditors  are  not  to 
be  let  in  upon  the  joint  estate,  until  all  the  joint  debts  are 
first  paid;  so  likewise  the  creditors  to  the  partnership  shall 
not  come  in  for  any  deficiency  of  the  joint  estate,  upon  the 
separate  estate,  until  the  separate  debts  are  first  paid. 


EX  PARTE  COOK  669 


Ex  Parte  COOK. 

In  the  High  Court  of  Chancery,  Before  Lord 
Chancellor  King,  1728. 

2  Peere  Williams's  Chancery  Reports,  499. 

Two  joint  traders  became  bankrupt,  and  a  joint  com- 
mission of  bankruptcy  is  taken  out  against  them,  upon 
which  the  commissioners  make  an  assignment  of  the  real 
and  personal  estate  of  the  two  bankrupts,  or  either  of  them; 
afterwards  the  separate  creditors  take  out  separate  com- 
missions against  these  two  bankrupts,  and  the  commissioners 
on  the  separate  commission  assign  over  the  separate  effects 
and  estate  to  other  assignees ;  and  now  the  assignees  under 
the  separate  commissions,  applied  by  petition  to  the  court, 
that  they  might  be  at  liberty  to  sue  at  law  for  the  separate 
estate. 

Lord  Chancellor:  It  seems  to  me,  that  the  assignment 
made  by  the  commissioners  upon  the  joint  commission, 
passes  as  well  the  separate  as  the  joint  estate  of  the  two 
partners  the  bankrupts,  consequently  the  assignees  on  the 
separate  commissions  can  make  nothing  of  their  action  at 
law,  and  I  will  not  suffer  them  to  spend  and  waste  the  estate 
in  vexatious  suits  there;  but  if  they  will  join  in  a  bill  in 
equity  for  an  account  of  the  separate  estate,  I  will  not  hinder 
them. 

It  is  settled,  and  is  a  resolution  of  convenience,  that 
the  joint  creditors  shall  be  first  paid  out  of  the  partner- 
ship or  joint  estate,  and  the  separate  creditors  out  of  the 
separate  estate  of  each  partner,  and  if  there  be  a  surplus 
of  the  joint  estate,  besides  what  will  pay  the  joint  creditors, 
the  same  shall  be  applied  to  pay  the  separate  creditors,  and 
if  there  be  on  the  other  hand  a  surplus  of  the  separate  estate, 
beyond  what  will  satisfy  the  separate  creditors,  it  shall  go  to 
supply  any  deficiency  that  may  remain  as  to  the  joint  credit- 


670  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

ors.  But  in  this  case,  for  the  ease  of  both  parties,  let  it  be 
referred  to  a  commissioner  in  each  of  these  commissions, 
to  take  an  account  of  the  whole  partnership  effects,  and  also 
of  the  separate  effects  and  estates  of  each  of  the  partners; 
and  if  the  commisioners  find  anything  difficult,  they  are 
to  be  at  liberty  to  state  it  specially;  and  with  regard  to  the 
surplus  of  the  partnership  effects,  beyond  what  will  pay  the 
partnership  debts,  and  also  touching  the  surplus  of  the 
separate  effects,  if  there  shall  remain  any,  over  and  above 
what  will  pay  the  separate  debts,  each  side  to  be  at  liberty 
to  apply  to  the  court  concerning  any  of  the  said  surpluses.^ 

*  Lord  Hardwicke  in  the  Matter  of  the  Simpsons,  i  Atk.  137,  1752, 
p.  138,  said :  "Formerly,  where  there  were  several  partners,  they  used 
to  take  out  several  commissions  against  each  partner,  as  well  as  a  joint 
commission.  This  practice  being  of  late  thought  a  very  unreasonable 
one,  as  occasioning  great  confusion  with  regard  to  bankrupt's  effects, 
has  been  discountenanced." 


I 


EX  PARTE  BAUDIER  671 

Ex  Parte  BAUDIER. 
In  the  High  Court  of  Chancery_,  Before  Lord 
Hardwicke_,  1742. 

I  Atkyns  Reports,  98. 
A  Separate  commission  taken  out  against  each  of 
two  persons  who  had  traded  in  partnership,  which  was 
dissolved  before  their  bankruptcy;  the  joint  creditors  pe- 
tition to  be  admitted  to  prove  their  joint  debts  under  each 
of  their  commissions. 

Lord  Chancellor :  Where  there  is  a  joint  commission 
taken  out  against  partners,  separate  creditors  may  come  in 
under  such  a  commission  and  prove  their  debts,  and  joint 
creditors  shall  be  satisfied  out  of  the  joint  estate,  and  sepa- 
rate creditors  out  of  the  separate  estate,  because  the  assign- 
ment in  that  case  is  of  the  whole  estate. 

But  where  there  are  two  persons  who  have  been  partners 
and  yet  the  commissions  are  taken  out  against  them  as  sepa- 
rate traders,  their  creditors  upon  the  joint  estate  cannot  be 
admitted  to  prove  their  joint  debts  under  each  commission, 
for  they  have  an  equitable  right,  in  case  there  should  be  any 
surplus  of  the  estates  of  the  two  bankrupts  after  the  separate 
creditors  are  satisfied. 

Nor  do  I  think  it  proper  to  appoint  a  receiver  on  behalf 
of  the  joint  creditors,  to  get  in  the  joint  effects  of  the  bank- 
rupt, but  they  must  proceed  in  the  common  course,  by  taking 
out  a  joint  commission.^ 


'  See,  hotvever,  ex  forte  Voguel,  i  Atk.  132,  1843 :  (A  and  B  were 
partners.  They  dissolved.  A  separate  commission  had  been  taken  out 
against  one.  The  joint  creditors  petitioned  that  the  joint  effects  seized 
under  the  separate  commission  might  be  divided  among  the  joint  cred- 
itors. Lord  Hardwicke  refused  the  petition,  giving  the  petitioners 
Hberty  to  bring  a  bill  in  equity  for  the  same  purpose.  He  gave  the  joint 
creditors  liberty  to  come  in  under  the  separate  commission  and  prove 
their  debts,  without  directing  whether  they  had  any  right  to  the  assets, 
or  any  prior  claim  on  the  assets  due  to  the  sale  of  the  joint  property")  ; 
also  ex  parte  Crisp,  i  Atk.  133,  1744:  (A  and  B  were  partners.  The 
joint  creditors  sued  out  a  commission  against  B.  Lord  Hardwicke 
doubted  the  right  of  the  joint  creditors  to  take  out  such  a  commission, 
and  directed  a  trial  before  Wtlles,  C.  J.  The  proceedings  in  the  Com- 
mon Pleas  are  reported  in  Willes.  467.  It  was  decided  that  joint  cred- 
itors could  take  out  such  a  commission,  but  that  the  distribution  of_  the 
assets  between  the  joint  and  several  creditors  could  only  be  determined 
by  a  bill  in  equity.     Lord  Hardwicke  acquiesced  in  this  opinion.) 


672  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 


Ex  Parte  HODGSON. 

In  the  High  Court  of  Chancery,  Before  Lord 
Thurlow,  1785. 

2  W.  Brozmt's  Chancery  Reports,  5. 

BuRNEY  the  bankrupt  was  partner  with  Davidson,  who 
is  in  the  East  Indies,  and,  being  indebted  separately  to  , 

to  whom  he  had  given  a  note,  she  pressed  him  for  a  better 
security ;  upon  which  he  gave  her  a  partnership  note.  Upon 
a  separate  commission  against  Burney,  she  proved  this  note ; 
and  the  present  petition  was,  that  the  proof  of  this  joint 
debt  upon  the  separate  commission  might  be  rescinded. 

Lord  Chancellor  refused  the  prayer  of  the  petition, 
there  being  no  distinction  as  to  sole  or  separate  debts,  and 
said  he  thought  proper  to  declare  that  debts,  whether  sole  or 
joint,  ought  to  be  paid  out  of  the  bankrupt's  estate ;  which 
is  composed  of  his  separate  estate,  and  of  his  moiety  of 
the  joint  estate,  and  therefore  ordered  that  she  should  come 
in  pari  passu  with  separate  creditors.^ 


^Accord:  Ex  parte  Page,  2  W.  Bro.  Ch.  Cas.  119,  1786;  ex  parte 
Flintum,  2  W.  Bro.  Ch.  Cas.  120,  1786. 

The  report  of  ex  parte  Hayden,  in  i  W.  Bro.  Ch.  Cas.  454,  a  case 
decided  about  the  same  time  as  ex  parte  Hodgson,  where  Lord  Thurlow 
permitted  the  joint  creditors  to  share  equally  in  the  separate  estate  with 
the  separate  creditors,  no  joint  commission  having  been  issued,  em- 
phasizes the  fact  that  there  were  no  joint  assets.  The  fuller  report  of 
the  same  case,  however,  in  Cooke's  Bankrupt  Laws,  Dublin  Ed..  1786, 
p.  7,  makes  the  question  of  partnership  or  no  partnership  the  real  ques- 
tion in  the  case,  and  the  right  of  the  firm  creditors  to  share  equally 
in  the  separate  assets  where  there  was  no  joint  commission,  apparently 
did  not  depend  on  the  non-existence  of  a  joint  estate.  Under  a  joint 
commission  Lord  Thurlow  distributd  the  joint  effects  to  the  joint 
creditors  and  the  separate  elifects  to  the  separate  creditors.  Ex  parte 
Market,  2  W.  Bro.  Ch.  Cas.  15,  1785. 

Lord  Loughborough  on  March  8,  1794,  issued  an  order,  see  4  W. 
Bro.  Ch.  Cas.  548,  which  permitted  the  separate  creditors  to  prove  their 
debts  and  have  the  separate  estates  administered,  under  a  joint  commis- 
sion, as  per  the  rule  in  ex  parte  Crowder,  supra,  p.  668,  without  the 
necessity  of  going  to  the  trouble  and  expense  of  bringing  a  petition. 


d 


EX  PARTE  ELTON  673 


Ex  Parte  ELTON. 

In  the  High  Court  of  Chancery,  Before  Lord 
Loughborough,  1796. 

3  Vesey  Junior's  Reports,  238. 

William  Fry  and  others  carried  on  business  in  part- 
nership as  cotton  manufacturers  under  the  firm  of  Wilham 
Fry  and  the  Rawleigh  Company.  In  July,  1792,  in  con- 
sideration of  1000/.  paid  by  the  petitioners  to  Wilham  Over- 
end,  one  of  the  Rawleigh  Company,  a  bill  of  exchange  for 
that  sum  was  duly  endorsed  to  the  petitioners.  The  bill  was 
dated  the  9th  of  July,  1792,  and  was  drawn  upon  Fry  and  his 
partners,  and  accepted  thus  in  the  hand-writing  of  Fry : 
"Accepted,  W.  Fry  and  Rawleigh  Company."  In  May, 
1793,  a  separate  commission  of  bankruptcy  issued  against 
Fry  as  distiller,  dealer  and  chapman.  The  bill  not  being 
paid  upon  applications  to  the  Rawleigh  Company,  the  draw- 
ers, and  the  indorsers,  the  petitioners  attempted  to  prove 
the  debt  for  the  purpose  of  receiving  a  dividend  under  the 
commission.  The  commissioners  reserved  a  dividend  upon 
the  claim,  in  order  that  the  opinion  of  the  Lord  Chancellor 
might  be  taken. 

The  opposite  cases  upon  this  point,  which  are  collected 
I  Cooke's  B.  L.  were  cited.  [7th  Edit,  by  Mr.  Roots,  244, 
&c.;  8th  Edit.  259,  &c.] 

Lord  Chancellor :  This  petition  seems  to  me  to  be  a  mat- 
ter under  very  pressing  circumstances.  I  do  not  mean  to 
decide  it  now ;  for  upon  considering  what  has  been  stated 
and  looking  into  the  cases  collected  by  Mr.  Cooke  it  appears 
to  have  been  understood  for  some  time,  that  a  joint  creditor 
is  entitled  to  prove  and  receive  a  dividend  from  the  separate 
estate.  At  the  same  time  I  understand  from  the  Attorney 
General  that  he  does  not  think  that  settled  as  matter  of  law, 
but  of  convenience,  and  subject  to  this  limitation;  that  if  the 


674  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

assignees  of  the  separate  estate  think  fit  or  will  undertake 
to  file  a  bill,  the  creditor  admitted  to  prove  is  to  be  restrained 
from  receiving  a  dividend.  If  it  stands  so,  it  is  an  order, 
that  can  only  be  made  here  in  this  Court:  it  is  impossible 
for  the  commissioners  either  in  town  or  country  to  admit, 
as  this  petition  supposes,  a  joint  creditor  to  take  a  dividend 
under  the  separate  commission ;  for  they  have  no  authority ; 
it  is  impossible  they  can  decide  of  themselves;  for  an  option 
to  be  given  to  assignees  is  a  thing  that  can  only  be  done  by 
an  order  here;  the  commissioners  have  no  power  to  do  it. 
The  consequence  therefore  in  every  such  case,  is,  that  there 
must  be  a  petition.  There  is  another  inconvenience,  if  the 
matter  remains  as  it  now  stands :  one  set  of  commissioners 
acting  upon  the  authority  of  the  first  edition  of  Mr.  Cooke's 
book  would  certainly  refuse  the  claim;  another  set  acting 
upon  the  second  edition  would  certainly  admit  it.  It  stands 
therefore  in  a  situation,  in  which  commissioners  would  find 
great  difficulty  how  to  act.  It  has  been  understood  for  a 
considerable  time,  according  to  Mr.  Cooke,  that  there  is  no 
difficulty  in  the  Court's  directing  the  commissioners  to  re- 
ceive the  proof  of  the  joint  debt.  Antecedent  to  these  au- 
thorities, I  should  have  thought  it  perfectly  clear,  it  could 
not  be  done ;  and  that  the  utmost  length,  they  could  go,  was, 
that  a  joint  creditor,  where  there  is  a  separate  commission, 
is  to  be  admitted  to  prove  only  for  the  purpose  of  assenting 
to  or  dissenting  from  the  certificate,  and  receiving  such  sur- 
plus beyond  the  amount  of  the  separate  debts,  as  joint  cred- 
itors would  be  entitled  to  claim,  where  there  are  two  com- 
missioners. I  doubt,  whether  it  is  possible  to  innovate  upon 
that,  which  was  the  law  formerly ;  for  though  a  commission 
is  an  execution,  and  the  joint  creditor  has  such  an  interest 
as  enables  him  to  take  out  a  separate  commission,  yet  th? 
consequence  does  not  follow.  There  are  cases  antecedent 
to  those  cited.  In  Lord  King's  time  it  was  determined,  that 
a  joint  creditor  might  be  a  good  petitioning  creditor,  though 
the  commission  is  only  against  one  partner;  that  the  joint 
creditor  does  no  more  in  taking  his  execution,  passing  over 


EX  PARTE  ELTON  675 

his  action,  than  bringing  the  separate  effects  to  be  admin- 
istered in  bankruptcy.  But  it  is  not  treated  any  longer  as 
an  execution  at  law ;  for  the  effects  taken  under  it  are  not 
disposed  of  as  at  law,  but  fall  immediately  by  the  direction 
of  the  statute  under  the  administration  of  this  Court ;  which 
is  to  make  an  equitable  distribution  among  the  creditors,  to 
admit  all  equitable  claims  upon  the  effects,  and  to  divide 
them  ratably.  It  has  long  been  settled,  and  it  is  not  possible 
to  alter  that,  that  each  estate  is  to  pay  its  own  creditors. 

With  regard  to  the  creditor  suing  out  the  commission, 
the  separate  creditors  cannot  object  to  his  having  the  effect 
of  the  execution  he  has  taken  out.  He  is  precluded  from 
suing  at  law  ;  and  it  would  be  against  all  Equity,  having  done 
it  for  their  benefit,  to  refuse  him  the  fruit  of  that  for  his 
OWH  debt.  But  any  other  joint  creditor  is  in  exactly  the 
case  of  a  person  having  two  funds;  and  this  Court  will  ):ot 
allow  him  to  attach  himself  upon  one  fund  to  the  prejudice 
of  those  who  have  no  other,  and  to  neglect  the  other  fund. 
He  has  the  law  open  to  him  but  if  he  comes  to  claim  a  dis- 
tribution, the  first  consideration  is,  what  is  that  fund,  from 
which  he  seeks  it.  It  is  the  separate  estate;  which  is  par- 
ticularly attached  to  the  separate  creditors.  Upon  the  sup- 
position, that  there  is  a  joint  estate,  the  answer  is  "apply 
yourself  to  that :  you  have  a  right  to  come  upon  it ;  the 
separate  creditors  have  not ;  therefore  do  not  affect  the  fund 
attached  to  them,  till  you  have  obtained  what  you  can  get 
from  the  joint  fund."  There  would  be  no  great  incon- 
venience, if  he  could  put  them  in  his  situation  as  to  the  joint 
fund :  but  I  doubt  very  much,  whether  that  is  possible ;  for 
suppose  in  the  case  of  A  and  B,  partners,  the  former  re- 
mains solvent,  the  latter  becomes  a  bankrupt,  and  there  is  a 
joint  debt  of  looo/.  The  creditor  making  his  claim  first 
against  the  separate  estate,  paying  a  dividend  of  icy.  in  the 
pound,  receives  500/.  Can  the  assignees  claim  against  the 
solvent  partner  what  they  have  paid  ?  His  answer  would  be 
they  could  only  claim  the  same  right  the  bankrupt  could; 
and  as  against  the  bankrupt  he  is  entitled  to  retain;  he  has 


616  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

paid  his  moiety  of  the  partnership  debt.  If  the  case  is  turned 
the  other  way,  and  the  creditor  first  sues  the  solvent  part- 
ner, he  recovers  all  the  debt  against  him ;  and  he  has  a  right 
to  come  in  as  a  separate  creditor  of  tlie  bankrupt  to  the 
amount  only  of  a  moiety  of  that  debt;  for  a  moiety  only  of 
the  debt  of  the  partnership  he  could  have  recovered  against 
him,  if  he  had  been  solvent.  That  makes  a  very  great  dif- 
ference to  the  separate  creditors.  I  was  led  to  consider  an- 
other thing:  is  it  possible  to  admit  a  separate  creditor  to 
take  a  dividend  upon  the  joint  estate  ratably  with  the  joint 
creditors?  No  case  has  gone  to  that;  and  it  is  impossible; 
for  the  separate  creditor  at  law  has  no  right  to  sue  the  other 
partner.  He  has  no  right  to  attach  the  partnership  property. 
He  could  not  only  attach  the  interest,  his  debtor  had  in  that 
property.  H  it  stands  as  a  rule  of  law,  we  must  consider, 
what  I  have  always  understood  to  be  settled  by  a  vast  variety 
of  cases,  not  only  in  bankruptcy  but  upon  general  Equity, 
that  the  joint  estate  is  applicable  to  partnership  debts,  the 
separate  estate  to  the  separate  debts.  Another  difficulty 
is,  whether  really  it  is  just  to  put  it  to  the  assignees  in  behalf 
of  the  separate  creditors  to  assert  the  right  of  the  creditor 
making  the  claim,  to  go  against  the  joint  estate.  The  credit- 
or coming  in  upon  the  separate  estate  is  first  to  answer  the 
question,  why  he  does  not  go  against  the  joint  estate.  It 
may  be  said,  "the  law  is  open  to  you;  it  is  not  open  to  us. 
You  put  us  to  file  a  bill  against  the  other  partners  to  discover 
and  apply  the  partnership  fund.  You  have  a  much  quicker 
remedy;  sue  the  partnership.  You  need  not  wait  the 
account.  They  will  settle  it  rather  than  put  you  to  that;  at 
all  events  you  have  a  legal  execution  against  them."  Another 
consideration  is,  that  the  great  object  of  the  law  in  establish- 
ing this  sort  of  authority,  in  which  I  now  sit,  is  to  make 
a  speedy  distribution  and  to  avoid  suits.  The  necessary  con- 
sequence of  admitting  a  joint  creditor  to  prove  against  the 
separate  estate  is  in  every  such  case  to  make  a  Chancery 
suit;  and  the  right  of  the  separate  creditors  to  the  adminis- 
tration of  their  fund  is  frustrated. 


EX  PARTE  ELTON  677 

I  throw  out  this,  desiring  extremely  to  have  the  assist- 
ance of  the  Bar,  and  of  those  who  are  peculiarly  conversant 
with  the  subject,  to  point  out  the  balance  of  convenience  and 
inconvenience;  whether  it  is  right  to  adhere  to  what  is  the 
rule  according  to  the  last  determination,  or  to  reconsider 
and  recast  the  whole.  There  is  nothing  so  inconvenient  as 
leaving  a  point,  that  must  so  frequently  occur,  to  any  am- 
biguity. It  cannot  remain,  as  it  now  stands.  If  it  is  a  pe- 
tition, of  course  it  is  under  singular  circumstances;  for  there 
is  nothing  purely  of  course  to  be  done  by  petition  to  me, 
that  I  cannot  by  a  general  rule  direct  the  commissioners  to 
do :  I  doubt,  that  is  impossible  here ;  for  they  could  not  put 
that  guard  upon  it,  that  it  should  not  be  a  general  order,  but 
that  the  assignees  might  stop  him  from  receiving  a  dividend, 
till  they  had  taken  out  of  the  joint  estate  what  he  should 
draw  from  the  separate  estate.  Wherever  my  order  will 
procure  an  account  of  the  joint  estate,  there  can  be  no  harm ; 
for  then  I  should  give  the  usual  directions  to  apply  the  funds 
respectively,  the  joint  estate  to  the  joint  debts,  the  separate 
to* the  separate  debts;  the  surplus  of  each  to  come  in  re- 
ciprocally to  the  creditors  remaining  upon  the  other.  But 
unless  I  can  do  that,  every  order,  I  can  make,  to  let  a  joint 
creditor  receive  a  dividend  from  the  separate  estate  would 
carry  a  Chancery  suit  in  the  bosom  of  it,  to-  have  the  joint 
estate  brought  into  the  fund,  to  prevent  the  separate  estate 
from  being  exhausted ;  and  I  should  make  the  order,  and  in 
the  course  of  ten  days  suspend  it  by  preventing  him  from  re- 
ceiving the  dividend. 

Let  it  stand  over;  and  if  it  is  possible  to  bring  it  on  in 
the  course  of  these  petitions,  I  should  be  extremely  glad  to 
have  it  very  fully  discussed. 

July  28.  Attorney  General  [Sir  John  Scott],  for  the 
Petition,  proceeding  to  argue  upon  the  cases,  that  had  been 
cited  before,  was  stopped  by  the  Court. 

Lord  Chancellor :  I  am  aware  of  all  those  cases ;  but  the 
difficulty,  that  has  struck  me  upon  it,  is,  that  what  I  order 
here  to-day,  sitting  in  bankruptcy,  I  shall  forbid  to-morrow 


678  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

sitting  in  Chancery ;  for  it  is  quite  of  course  to  stop  the  divi- 
dend upon  a  bin  filed.  The  plain  rule  of  distribution  is,  that 
each  estate  shall  bear  its  own  debts.  The  Equity  is  so  plain, 
that  it  is  of  course  upon  a  bill  filed.  The  object  of  a  com- 
mission is  to  distribute  the  effects  with  the  least  expense. 
Every  order  I  make  to  prove  a  joint  debt  upon  the  separate 
estate  must  produce  a  bill  in  Equity.  It  is  not  fundamentally 
a  just  distribution,  nor  a  convenient  distribution;  because 
it  tends  to  more  litigation  and  more  expense.  Every  creditor 
of  the  partnership  would  come  upon  the  separate  estate. 
The  consequence  would  be,  the  assignees  of  the  separate 
estate  must  file  a  bill  to  restrain  the  dividend  upon  all  these 
proofs,  and  make  the  partners  parties.  But  there  is  another 
circumstance.  It  is  a  contrivance  to  throw  this  upon  the 
separate  estate;  for  what  hinders  them  from  recovering  at 
law  this  debt  against  the  partnership ;  for  it  is  money  paid  to 
one  of  the  partners.  They  have  nothing  to  do  but  to  bring 
an  action  against  the  partners.  The  affairs  of  the  partner- 
ship may  be  very  much  involved :  but  if  they  are  arrested, 
they  would  pay  it.  It  is  not  stated  as  a  case,  where  there 
are  no  joint  effects.  Here  it  is  only,  that  there  are  two 
funds.  Their  proper  fund  is  the  joint  estate ;  and  they  must 
get  as  much  as  they  can  from  that  first.  There  is  this 
singularity  attending  this  case ;  that  the  whole  transaction 
between  them  and  Fry  is  a  partnership  transaction.  The 
money  was  paid  to  one  of  the  partners;  most  probably  for 
the  use  of  the  partnership :  the  bill  was  drawn  and  accepted 
in  the  name  of  the  partnership.  I  have  no  difficulty  in  or- 
dering them  to  be  admitted  to  prove;  but  not  to  receive  a 
dividend.  Will  the  assignees  sue  the  partners  in  the  name 
of  the  petitioners?  It  occurred  to  me,  when  this  came  on 
before,  and  no  answer  was  given  to  it,  that  if  the  rule  stands 
as  you  suppose,  there  never  would  be  a  joint  commission; 
but  they  would  take  out  a  separate  commission  against  each 
partner. 

The  order  was,  that  the  petitioners  shall  be  admitted, 
but  not  to  receive  a  dividend;  and  that  the  dividend  upon 


EX  PARTE  ELTON  679 

the  proof  shall  be  reserved,  till  an  account  is  taken  of  what 
they  have  or  might  have  received  from  the  partnership 
effects.^ 


^  Ex  parte  Clay,  6  Ves.  813,  1802.  (Lord  Eldon :  "The  rule  that 
prevailed  in  Lord  Hardwicke's  time,  and  down  to  the  time  of  Lord 
Thurlow  was,  that  joint  creditors  should  not  be  admitted  to  prove  under 
a  separate  Commission  for  the  purpose  of  receiving  dividends  with  the 
separate  creditors.  Lord  Thurlow  altered  that  upon  much  considera- 
tion; thinking,  the  joint  creditors  ought  to  be  admitted  with  the 
separate  creditors;  and  left  it  so,  when  he  left  this  Court.  Lord  Lough- 
borough thought,  that  was  not  right ;  and  got  back  again,  not  quite  to 
the  old  rule ;  but  he  settled  it,  that  they  should  prove  only  for  the  pur- 
pose of  keeping  separate  accounts,  but  not  to  receive  a  dividend.  I 
do  not  presume  to  say,  which  is  the  best  rule ;  except,  that  the  last  is 
open  to  this  difficulty;  that  the  creditor  is  not  a  party  to  the  proceed- 
ings under  the  Commission.  But  I  think  it  better  to  follow  the  rule, 
that  I  find  established,  than  to  let  it  be  continually  changing,  so  that  no 
one  can  tell,  how  it  is.  Therefore  unless  some  more  prominent  mischief 
can  be  pointed  out,  take  the  order  according  to  Lord  Loughborough's 
rule.") 


680  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 


GRAY  V.  CHISWELL. 

In  the  High  Court  of  Chancery,  Before  Lord  Eldon, 

1803. 

9  Vesey  Jwiior's  Reports,   118. 

The  bill  was  filed  by  annuitants,  under  the  will  of  John 
Cock,  against  the  executrix  and  the  heir  at  law  of  Mr.  Chis- 
well ;  who  was  the  executor  under  that  will,  for  an  account, 
etc.  The  usual  accounts  were  directed;  and  by  the  report  a 
considerable  debt  from  the  estate  of  Mr.  Chiswell  to  that  of 
Cock  was  established;  including  the  penalty  of  a  bond  of 
8000/.;  for  which  sum  the  Master  stated  the  plaintiffs  to  be 
specialty  creditors ;  and  the  general  balance  beyond  that  was 
2471/.  15^.;  a  simple-contract  debt.  The  joint  creditors  of 
Chiswell  and  Nantes  who  had  proved  their  debts  under  a 
Commission  of  Bankruptcy  against  Nantes,  as  surviving 
partner,  went  in  under  an  order ;  and  proved  their  debts  be- 
fore the  Master.  No  appropriation  had  been  made  to  an- 
swer the  annuities  of  the  plaintiffs.  Chiswell  died  seised  of 
freehold  estates.  The  cause  coming  on  for  farther  direc- 
tions, the  simple  contract  creditors  of  Chiswell  claimed  to 
stand  upon  his  real  estate  to  the  extent  of  8000/.^  the  bond 
debt  proved  by  the  plaintiffs,  and  paid  out  of  his  personal 
estate,  and  the  only  debt  by  specialty,  to  which  he  was  liable ; 
and  that  the  said  sum  may  be  raised  by  sale  or  mortgage  of 
the  real  estate  devised  to  the  executrix.  A  question  arose 
between  the  joint  creditors  and  the  separate  creditors  of 
Chiswell ;  the  latter  contending,  that  out  of  Mrs.  Chiswell's 
balance,  when  paid  in,  and  the  8000/.,  when  raised  and  paid 
in,  the  separate  simple  contract  of  Chiswell  may  be  paid 
their  respective  debts  in  preference  to  the  joint  creditors  of 
Chiswell  and  Nantes;  and  that  the  balance  only,  after  such 
payment,  may  be  paid  over  to  the  assignees,  to  be  distributed 
to  the  joint  creditors  under  the  commission. 


GRAY  V.  CHISWELL  681 

The  joint  creditors  insisted  upon  their  right  to  come 
in  pari  passu  with  the  separate  creditors  of  Chiswell  against 
his  separate  estate.  It  was  admitted,  that  the  joint  estate 
was  insolvent,  and  would  pay  only  an  inconsiderable  divi- 
dend; and  that,  the  surviving  partner  having  brought  into 
the  firm  an  inconsiderable  sum,  upon  a  final  adjustment  the 
joint  estate  would  be  greatly  indebted  to  the  separate  estate.^ 

The  Lord  Chancellor:  This  question  is  new 
in  specie,  and  has  not  been  determined  by  any  of  the 
cases.  These  joint  creditors  ask  a  great  deal  more  than  they 
could  in  bankruptcy;  for  there  they  could  not  touch  the 
separate  estate,  until  the  separate  creditors  were  fully  satis- 
fied. They  have  had  their  demand  effectuated  against  the 
joint  estate  surviving ;  and  now  contend,  that  by  the  accident 
of  the  death  they  shall  be,  not  only  upon  an  equal,  but  upon 
a  better,  footing,  as  against  the  separate  creditors,  than  if 
the  party  had  lived,  and  had  become  a  bankrupt.  It  would 
be  extraordinary  to  say  that.^ 

The  decree  declared,  that  the  separate  creditors  of  the 
testator,  Chiswell,  are  entitled  in  the  first  place  to  be  paid 
their  respective  debts  out  of  his  separate  estate ;  and  that 
the  joint  creditors  are  entitled  to  the  residue. 

*  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted, 
■  The  rest  of  the  opinion  is  omitted. 


682  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 


Ex  Parte  HILL. 

In  the  High  Court  of  Chancery,,  Before  Lord  Eldon, 

1802. 

2  Bosanquet  and  Puller's  Report,  New  Series,  191,  note  a. 

Copland  and  M'Knight  jointly  purchased  a  quantity 
of  rum.  This  they  pledged  with  the  petitioners,  who  lent 
their  money  on  it,  and  in  fact  to  pay  for  it.  They  had  no 
other  dealings  together  as  partners.  Rum  fell  in  value. 
The  rum  pledged  was  sold,  and  did  not  produce  the  amount 
of  the  money  lent.  The  petitioners  brought  a  joint  action, 
in  which  M'Knight  let  judgment  go  by  default.  M'Knight 
and  Copland  both  became  bankrupts  under  separate  com- 
missions, and  the  commission  against  Copland  was  dated  the 
31st  May,  but  a  verdict  was  recovered  against  him  by  the 
petitioner  on  the  26th  of  June  last  for  2287/.  6.?.  2d,  the 
amount  of  the  moneys  due  after  deducting  the  produce  of 
the  rum.  The  time  of  the  sale  of  the  rum  did  not  appear. 
The  commissioners  under  Copland's  commission  considered 
this  as  a  joint  debt,  and  refused  to  admit  the  proof  of  it 
except  for  the  purpose  of  assenting  to,  or  dissenting  from 
the  certificate. 

The  petitioners  prayed  that  the  commissioners,  acting 
under  the  said  commission  against  Robert  Copland,  might 
receive  the  proof  of  the  amount  of  the  petitioner's  debt  and 
costs,  when  taxed,  and  that  the  petitioner  might  be  paid 
dividends  thereon,  rateably  with  the  other  creditors  of  the 
said  Robert  Copland.  The  two  points  raised  were,  ist,  that 
there  was  no  joint  estate,  and  therefore  that  the  debt  ought 
to  be  proved  against  each  separate  estate.  Ex  parte,  Hay- 
don,  Cooke,  Bank,  Laws.  240.  2dly,  that  the  debt  was  a  debt 
which  might  have  been  proved  before  the  verdict,  and  there- 
fore that  the  costs  ought  to  be  proved,  though  the  verdict  was 
after  the  commission.  Lezvis  v.  Peircy,  i  H.  Bl.  29.  Watts 
v.  Hart,  I  Bos.  &  Pull.  134. 


EX  PARTE  HILL  683 

On  the  other  side  it  was  said  that  here  was  a  joint  es- 
tate, viz.  the  goods  pledged.  2dly,  that  the  general  rule  is 
that  where  the  verdict  is  after  the  commission,  costs  cannot 
be  proved.  *     *     *. 

Lord  Chancellor:  The  case  ex  parte  Elton,  3  Ves. 
jun.  238,  has  settled  the  matter,  and  therefore  I  will  not  un- 
settle it,  but  should  rather  have  adhered  to  Lord  Thurlow's 
rule.  But  when  there  are  no  joint  effects,  that  takes  the  case 
out  of  Ex  parte  Elton.  Joint  effects  means  such  as  are  under 
the  administration  of  assignees  to  distribute,  not  as  in  this 
case,  where  the  only  joint  effects  were  those  pledged  to  the 
petitioners,  to  more  than  the  amount.^ 


^  The  part  of  the  opinion  which  deals  with  the  question  of  costs 
is  omitted.    Lord  Eldon  decided  that  the  costs  could  not  be  proved. 

Prior  to  the  decision  in  this  case,  Lord  Loughborough,  after  his 
decision  in  ex  parte  Elton,  had,  in  ex  parte  Abell,  4  Ves.  837,  1799, 
directed  that  the  joint  creditors  should  receive  nothing  from  the  separate 
estate  until  the  separate  creditors  had  been  paid  in  full,  although  in 
that  case  there  does  not  seem  to  have  been  any  joint  estate,  and  the 
assertion  is  made  by  counsel  that  all  the  other  partners  were  insolvent. 
In  ex  parte  Pinkerton,  6  Ves.  814,  note,  1801,  Lord  Eldon,  in  the  absence 
of  a  joint  estate,  allowed  the  joint  creditor  to  prove  under  a  separate 
commission.  This  was  merely  the  rule  of  ex  parte  Elton.  Lord  Eldon's 
language,  however,  as  reported,  would  indicate  that  he  ultimately  allowed 
the  joint  creditors  to  come  in  pari  passu  with  the  separate  creditors 
as  he  did  later  in  our  principal  case,  for  he  says :  "it  seemed  very 
singular,  that  the  nature  of  the  debt,  should  turn  upon  the  fact,  whether 
there  is  joint  property,  or  not."  Besides,  the  expression  "right  to  prove" 
is  used  by  reporters  as  equivalent  to  "right  to  prove  and  take  a  divi- 
dend." 

Compare  with  our  principal  case  the  following  cases: 

Ex  parte  Peake,  2  Rose  54,  1814.  (The  joint  estate  amounted  to 
only  i£  IIS.  6d.  The  joint  creditors  were  not  allowed  to  come  in  on 
the  separate  estate.  Lord  Eldon :  "If  in  point  of  fact  there  is  joint 
property,  whether  to  the  amount  of  five  pounds  or  five  shillings,  it  is 
an  answer  to  this  application"  [of  the  joint  creditors]). 

Ex  parte  Kennedy,  2  DeG.  M.  &  G.,  228,  1852:  (The  joint  estate 
amounted  to  £13,  which  were  entirely  exhausted  in  the  payment  of  costs. 
Held,  that  the  joint  creditors  could  not  receive  any  dividend  from  the 
joint  estate  until  the  separate  creditors  were  paid  in  full.) 

In  re  McEwen.  12  Nat.  Bk.  Reg.  11.  1874:  {Held,  that  the  36th 
section  of  the  Act  of  1867  regarding  the  distribution  of  assets  in  cases 
of  the  bankruptcy  of  a  partnership,  which  directed  that  the  separate 
creditors  should  have  priority  on  separate  funds,  applied  only  where 
there  was  a  net  balance  of  partnership  assets  after  paying  costs,  and  that, 
where  there  was  no  such  balance,  the  partnership  and  prior  creditors 
shared  pari  passu  in  individual  assets.  Accord:  In  re  Slocum,  1879, 
cited  5  Fed.  50.) 

Harris  v.  Peahody,  72,  Me.  262,  1881 :  (A  and  B  were  partners. 
The  firm  was  insolvent,  and  its  assets,  amounting  to  only  $1.19,  were 
absorbed  in  the  expenses  of  the  sale.     B  was  insolvent,  A  having  no 


684  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

assets  or  individual  debts.    The  joint  creditors  were  allowed  to  come  in 
pari  passu  with  B's  individual  creditors  on  B's  separate  assets.) 

See  also:  In  re  Marwick,  2  Ware  229,  1845:  (The  joint  estate 
consisted  of  worthless  claims.  A  separate  creditor  of  one  partner  pur- 
chased one  of  these  claims  for  $40  for  the  purpose  of  creating  a  joint 
estate.  Held,  he  had  created  it,  and,  therefore,  the  separate  creditors 
of  the  partner  should  be  paid  in  full  out  of  the  separate  estate  before 
the  firm  creditors  received  anything,  a  ruling  which  prevented  the  joint 
creditors  receiving  anything,  as  the  separate  estate  was  exhausted  in 
paying  the  separate  creditors.) 


EX  PARTE  KENSINGTON  685 


Ex  Parte  KENSINGTON. 

In  the  High  Court  of  Chancery,  Before  Lord  Eldon, 

1808. 

14   Vesey  Junior's  Reports,  447. 

In  these  petitions  and  three  others  in  the  paper  of  bank- 
ruptcy the  question  was,  whether  a  joint  debt  could  be  proved 
under  a  separate  commission  for  the  purpose  of  receiving 
dividends  with  the  separate  creditors,  where  there  was  no 
joint  estate,  but  there  was  a  solvent  partner. 

Mr.  Cooke,  in  support  of  the  petition  of  the  joint  cred- 
itor to  prove,  mentioned  Ex  parte  Elton,  Ex  parte  Abell, 
Ex  parte  Pinkerton ;  in  which  last  case  there  was  a  solvent 
partner,  abroad,  and  not  likely  to  return;  and  there  was  no 
joint  property;  and  the  proof  was  ordered. 

Sir  Samuel  Romilly,  for  the  assignees,  opposed  the  pe- 
tition; insisting,  that  the  order  made  according  to  the  ar- 
rangement in  Ex  parte  Abell,  that  the  creditor  should  take 
a  dividend  upon  a  sum,  not  exceeding  an  eighth  part,  under 
a  commission  against  one  of  eight  partners,  could  not  be  sup- 
ported ;  the  consequence  of  admitting  the  proof,  in  respect  of 
the  bankrupt's  proportion  of  the  debt  upon  a  contribution, 
being,  that  all  the  dividends  must  be  delayed,  until  the  ac- 
counts of  all  the  partnership  debts  were  taken;  that  in  Ex 
parte  Pinkerton  the  order  was  made  on  the  ground,  that, 
the  solvent  partner  being  abroad,  the  creditor  could  not  with- 
out great  difficulty  resort  to  the  other  fund;  but,  in  general 
cases  the  reason  against  admitting  the  proof,  where  there 
is  joint  estate,  that  there  is  another  fund,  to  which  the  cred- 
itor may  resort,  applies,  where  there  is  a  solvent  partner. 

The  Lord  Chancellor  :  This  question  respecting  joint 
and  separate  creditors  has  been  much  agitated.  Lord  Thur- 
low  thought,  the  joint  creditors  were  entitled  to  prove;  as, 
though  the  contract  was  joint,  the  execution  was  separate. 


686  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

Lord  Rosslyn  when  he  first  came  to  this  bench,  preferred 
that  rule;  which  he  had  often  agitated  at  the  bar;  but  his 
Lordship  afterwards  established  the  rule  in  Ex  parte  Elton. 
When  I  succeeded  Lord  Rosslyn,  I  declared,  that,  though  the 
principle  of  that  rule  appeared  to  me  to  be  doubtful,  the  rule 
was  settled ;  and  ought  not  to  be  shaken.  In  Ex  parte  Pink- 
erton  I  was  influenced  by  the  circumstance,  that  the  solvent 
partner  was  abroad.  I  think,  in  this  case  a  proof  cannot  be 
made  without  resorting  to  the  solvent  partner.^ 

^  In  a  subsequent  petition  Ex  parte  Kendall,  April  5,  180S,  the  case 
Ex  parte  Kensington  was  acted  upon  without  comment. 

Ex  parte  Morris,  Mont.  218,  1831 :  (A,  B,  C,  D,  E  were  partners. 
They  granted  an  annuity  to  F.  A  and  B  were  bankrupts,  C  was  abroad, 
D  had  applied  to  take  the  benefit  of  the  Insolvent  Act,  admitting  ii,6oo 
liabilities  and  no  assets.  There  were  no  joint  assets.  A  Commission 
was  issued  againt  E.  F  tried  to  prove  and  take  a  dividend  under  E's 
estate.  Held,  that  he  could  not  do  so,  as  D  had  not  been  formally 
declared  a  bankrupt.)    Accord:    Ex  parte  Janson,  Buck  227,  1818. 


BELL  V.  NEWMAN  687 


BELL  V.  NEWMAN. 
In  the  Supreme  Court  of  Pennsylvania,,  1819T 

5  Sergeant  and  Rawle's  Reports,  78. 

John  Waddington  was  the  surviving  partner  of 
Thomas  Cookson,  a  merchant  residing  in  England.  Wad- 
dington Hved  in  Philadelphia,  and  at  the  time  of  his  death 
was  indebted  to  sundry  persons  on  his  partnership  account, 
and  to  William  Bell  on  his  private  account.  The  defendant 
had  in  his  hands  to  be  administered,  some  private  property 
of  John  Waddington,  and  also  some  of  the  partnership  prop- 
erty of  Cookson  &  Waddington,  but  not  enough  to  pay  the 
partnership  debts.  The  question  submitted  to  the  Court  was, 
whether  the  separate  property  should  be  applied  in  the  first 
instance  to  the  payment  of  the  debt  due  to  William  Bell,  or 
whether  the  partnership  creditors  should  come  in  pro  rata} 

Tilghman,  C.  J. :  [Held,  that  the  Act  of  April  19, 
1794,  giving  to  all  creditors  of  an  equal  nature  an  equal 
share  of  the  intestate's  estate  in  case  of  a  deficiency  of  assets, 
could  only  be  satisfied  by  directing  that  the  separate  credit- 
ors should  receive  as  much  out  of  the  separate  property  as 
the  joint  creditors  received  from  the  portion  of  such  separate 
partner  in  the  joint  property,  and  then  that  the  balance  of 
the  separate  property  should  be  divided  among  the  joint  and 
separate  creditors  pro  rata.Y 

Gibson  J. :  In  bankruptcy  the  rule,  that  the  joint  and 
separate  estates  shall  be  marshalled  in  favour  of  the  re- 
spective creditors,  is  undoubted:  but  I  have  found  no  de- 
cision on  the  subject  of  its  applicability,  in  England,  and 
but  one  in  this  country,  to  cases  of  insolvency.    It  is  in- 

^The  Reporter's  notes  of  the  argument  of  council  are  omitted. 

'  His  opinion  is  omitted.  It  has  not  been  followed  in  Pennsylvania. 
See  Black's  App.,  44  Pa.  503,  1863.  A  similar  rule,  however,  would 
appear  to  prevail  in  Kentucky.  See  Fayette  Nat.  Bk.  v.  Kenney,  79 
Kty.  133,  1880,  p.  140. 


688  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

deed  said  by  Mr.  Watson  in  his  Treatise  on  the  Law  of 
Partnership,  p.  370,  that  there  is  a  different  rule  as  to  in- 
solvency; but  Burn  v.  Burn,  (3  Ves.  jun.  573),  which  he 
cites,  most  clearly  contains  no  such  distinction.  That  was 
the  case  of  a  bond  joint  on  its  face  and  executed  by  one 
partner,  in  the  name  of  the  firm,  to  secure  a  partnership 
debt;  and  it  was  held  it  should  be  considered  joint  and 
several  against  the  separate  creditors,  and  the  obligee  let 
in  for  a  separate  specialty  debt,  the  evidence  that  the 
parties  intended  to  be  severally  bound,  being  clear.  All 
the  Court  did,  therefore,  in  that  case,  was  to  correct  a 
mistake,  by  putting  the  parties  in  the  situation  they  would 
have  been  in,  if  no  accident  had  happened :  and  it  is  very 
clear  that  a  partnership  creditor,  by  a  joint  and  several 
bond,  may  elect  to  come  in  as  a  separate  creditor,  although 
by  doing  so,  he  abandons  his  claim  on  the  joint  estate,  till 
the  other  creditors  are  paid.  Ex  parte  Banks,  i  Atk.  106 
Burn  V.  Burn,  was  that  case :  but  the  Court  did  not  decide 
what  the  obligee's  rights  would  have  been  in  the  character 
of  a  joint  creditor,  they  merely  reformed  the  instrument 
according  to  the  original  intention  of  the  parties,  which 
is  a  very  familiar  proceeding  in  equity.  In  England  I 
apprehend  it  is  not  decided,  whether  the  rule  be  peculiar  to 
bankruptcy,  or  a  general  principle  of  equity  applicable  to 
all  cases  of  marshalling  assets  between  joint  and  separate 
creditors.  In  no  case  does  its  precise  foundation  appear. 
Lord  Thurlow  denied  it  altogether :  Lord  Rosslyn  puts 
it  on  grounds  partly  of  convenience,  and  partly  of  abstract 
equity;  and  subsequent  chancellors  have  sustained  it, 
doubting  its  propriety.  It  certainly  does  not  arise  from 
any  provision  of  the  statues  concerning  bankruptcy;  for 
not  one  of  them  mentions  partners  in  relation  to  this  ques- 
tion. It  could  not  have  been  originally  founded  in  con- 
venience, which  never  can  excuse,  much  less  justify  a  de- 
parture from  justice,  and  the  rights  of  the  partnership 
creditors  ought  not  to  be  affected  by  any  consideration  of 
embarrassment   to   third    persons    arising   from   their   en- 


BELL  V.  NEWMAN  689 

forcement.  The  only  inconvenience  would  be  the  post- 
ponement of  settling  the  separate  estate  until  the  partner- 
ship accounts  were  taken  and  settled,  and  this  might  have 
been  surmounted,  or  at  least  endured.  The  rule  therefore 
must  be  deemed,  and  I  think,  justly,  an  abstract  principle 
of  equity,  operating  in  all  cases  where  chancery  admin- 
isters the  assets  of  an  insolvent  partner.  There  is  nothing 
in  the  nature  of  the  commission  itself  to  create  a  differ- 
ence ;  for  though  it  is  sometimes  called  a  statute  execution, 
it  is  in  fact  nothing  more  than  the  means  and  instrument 
of  equity,  and  does  not  constitute  nor  can  it  alter  the  ab- 
stract propriety  of  any  rule  of  distributing  among  credit- 
ors the  remnant  of  their  own  property.  At  law,  or  even 
in  equity,  where  there  is  no  insolvency,  a  joint  creditor 
may  go  directly  against  the  separate  estate  of  a  deceased 
partner,  and  it  is  by  viewing  the  commission  as  analogous, 
and  a  means  of  enforcing  a  right  against  the  partner, 
without  at  the  same  time  considering  the  proceedings  un- 
der it,  as  a  process  of  distribution  among  the  creditors 
that  doubt  with  respect  to  the  solidity  of  the  rule  in  ques- 
tion is  generated.  The  ground  of  Lord  Thurlow's  opinion 
was,  that  although  the  contract  was  joint,  yet  execution 
being  several  might  be  had  against  the  separate  estate, 
and  by  preserving  the  analogy  between  an  execution  and 
a  commission,  the  joint  creditors  might  come  in.  If,  in 
despite  of  this  technical  notion,  the  rule  still  holds  in 
bankruptcy,  a  fortiori,  it  ought,  where  all  is  distributory 
without  the  most  remote  analogy  to  an  execution.  But  it 
appears  to  me,  the  rule  is  founded  in  the  most  substantial 
justice.  Why  should  any  class  of  creditors  in  preference 
to  the  rest,  be  exclusively  entitled  to  the  joint  fund,  and 
concurrently  entitled  to  the  separate  estate?  Equality  is 
equity;  and  the  joint  creditors  have  already  an  immense 
advantage  over  the  separate  creditors  in  being  exclusively 
entitled  to  the  partnership  fund :  it  is  the  largest ;  for  men 
in  trade  usually  embark  their  all  in  it,  and  seldom  have 
much  separate  property.     And,  independent  of  distributive 


690  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

rights,  the  joint  creditors  have  a  degree  of  security  for 
their  debts,  and  faciHties  in  recovering  them,  w^hich  the 
separate  creditors  have  not :  they  can  sell  both  joint  and 
separate  estate  on  an  execution,  while  the  separate  creditor 
can  sell  only  the  separate  estate,  and  the  interest  in  the 
concern  that  may  remain  to  the  partner,  after  the  accounts 
of  the  debts  and  effects  of  the  partnership  are  taken,  as 
betw^een  the  partners  and  their  creditors,  and  as  between 
the  partners  themselves.  This  exclusive  liability  of  the 
partnership  estate  to  the  joint  creditors  is  founded  on  no 
equity  peculiar  to  themselves,  but  results  from  the  nature 
of  the  contract  of  partnership  which  requires  the  joint 
debts  to  be  paid  before  the  equity  can  be  settled  between 
the  partners,  each  being  individually  liable  till  all  is  paid. 
Concede  the  present  question  to  the  joint  creditors,  and 
you  give  them  in  effect,  a  monopoly  of  the  insolvent  whole 
estate.  What  merit  do  they  possess  that  the  separate 
creditors  may  not  lay  claim  to?  In  the  usual  course  of 
transactions,  each  class  indiscriminately  trusts  to  the  whole 
estate,  both  joint  and  separate.  Judge  Cooper,  in  his 
Treatise  on  the  BankPupt  Law,  page  300,  arguing  with  his 
usual  force  and  ingenuity  against  the  equity  of  the  rule  in 
bankruptcy,  founds  himself  on  the  assumption  that  the 
joint  creditors  are  the  exclusive  contributors  to  the  mass 
of  the  joint  estate,  and  therefore  that  the  remnant  of  it  is 
peculiarly  their  property;  and  that  both  joint  and  separate 
creditors  contribute  to  the  separate  estate,  although  in 
an  unequal  degree,  the  debts  due  the  separate  creditor  be- 
ing mostly  contracted  for  articles  of  consumption;  and 
that  while  the  partnership  debts  have  a  tendency  to  in- 
crease the  whole  mass  of  the  estate,  the  separate  debts  tend 
to  decrease  it.  All  these  assertions,  as  general  proposi- 
tions, are  unfounded.  As  to  the  first,  an  insolvent  joint 
fund  consists  of  the  remnant  of  what  was  originally  taken 
from  the  indkndnal  estates  of  all  the  partners,  and,  by  the 
very  act  of  turning  it  into  stock,  put  beyond  the  immediate 
reach  of  those  who  were  their  separate   creditors   at  the 


BELL  V.  NEWMAN  691 

time:  and  as  to  the  second,  where  the  concern  has  been  a 
losing  one,  there  is  no  great  reason  to  presume  the  profits 
of  the  business  added  much  to  the  separate  property.  The 
stock  can  increase  the  latter,  only  by  being  improperly  with- 
drawn from  trade  for  that  purpose;  and  as  the  other  part- 
ners have  a  direct  interest  in  preventing  such  a  measure, 
it  is  unreasonable  to  believe  that  anything  like  a  majority 
of  cases  of  failure  of  the  joint  fund  can  fairly  be  attributed 
to  that  cause.  It  is  no  more  universally  true,  that  every 
partnership  debt  brings  as  much  property  into  the  joint 
fund  as  it  takes  out,  than  that  each  separate  debt  adds  its 
own  amount  to  the  aggregate  of  the  separate  estate.  In 
either  case,  the  purchase  of  articles  of  consumption  excepted, 
the  matter  depends  entirely  upon  whether  the  speculation 
were  a  good  or  a  bad  one.  As  to  articles  of  consumption, 
which  is  the  only  class  that  does  not  add  to  the 
bulk  of  the  separate  estate,  if  they  are  purchased  on  credit, 
nothing  is  thereby  drawn  from  the  joint  fund,  and  if  paid 
for  at  the  time,  they  form  no  part  of  the  debts  that  enter 
into  competition  with  the  joint  creditors,  although  the  pay- 
ment of  their  price  may  have  lessened  the  separate  estate 
pro  tanto.  Indeed  the  same  remark  is  applicable  to  all  ar- 
ticles purchased  on  separate  account,  whether  for  con- 
sumption or  not :  these,  though  they  may  in  some  instances 
lessen  the  separate  estate,  their  own  appropriate  fund,  yet 
cannot,  in  the  usual  course,  diminish  the  fund  of  the  joint 
creditors,  which  alone  could  give  them  an  equitable  right 
to  come  on  a  fund  thus  increased  at  their  expense.  The 
claim  of  each  class  is,  therefore,  equally  meritorious,  both 
as  to  the  motives  for  giving  credit,  and  as  to  creating  or 
increasing  the  respective  funds,  out  of  which  each  is  to  be 
satisfied:  if  then  the  policy  of  trade  requires  that  the  joint 
fund  shall  be  appropriated,  in  the  first  instance,  to  payment 
of  the  joint  debts,  justice,  equity,  and  conscience,  on  the 
other  hand,  without  interfering  with  that  policy,  demand 
that  the  separate  creditors  should,  at  least,  have  the  miser- 
able advantage  of  the  same  priority  as  regards  the  separate 


692  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

estate.  It  is  unconscionable,  that  one  class  should  have 
the  exclusive  benefit  of  one  fund,  and  come  in  concurrently 
on  the  other,  when  both  equally  trusted  to  all  the  in- 
solvent's estate,  whether  joint  or  separate,  and  when  there 
is  no  reason  peculiarly  applicable  to  either,  to  presume  the 
credit  given  by  the  one,  had  a  tendency  to  create  or  in- 
crease the  fund  appropriated  to  the  other.  In  JVoddrop  v. 
Ward  executor  of  Price,  3  Desaus.  Cha.  Rep.  203,  where 
every  thing  peculiar  to  bankruptcy  was  out  of  the  question, 
the  rule  was  adopted  in  a  case  which  cannot  be  distinguished 
in  principle,  from  the  present. 

The  rule  just  proposed  by  the  Chief  Justice,  is  cer- 
tanl}-  more  consonant  with  equity,  than  that  which  would 
let  in  the  joint  creditors  without  any  restriction  or  limitation 
whatever,  but  I  object  to  it,  because  it  wants  reciprocity. 
Suppose  the  separate  creditors  to  have  got  twenty-five 
per  cent,  from  the  separate  estate :  will  they  be  permitted 
to  come  on  the  joint  estate  pari  passu  with  the  joint 
creditors,  after  the  latter  have  drawn  from  it  in  the  same 
proportion?  It  is  evident  therefore  the  rule  would  operate 
unequally,  by  making  the  separate  creditors  share  their 
fund  with  the  joint  creditors,  where  it  happens  to  be  the 
largest,  without  subjecting  the  latter  to  share  theirs  under 
the  like  circumstances.  It  may  be  said,  it  is  impossible 
to  put  them  on  a  footing  in  this  respect,  I  grant  it  cannot 
be  done  on  any  plan  of  participating  in  the  same  fund :  but 
you  precisely  put  them  on  a  footing  by  making  each  fund 
bear  the  burthen  of  its  own  debts;  and  if  that  of  the  sepa- 
rate creditors  should  happen  to  be  the  most  productive,  I 
know  not  on  what  principle  of  equity  they  can  be  deprived 
of  the   advantage. 

But  it  is  said,  the  rule  is  controlled  by  our  statute  of 
distribution,  which  settles  the  priority  of  the  different 
grades  of  debts,  without  making  any  distinction  between 
the  different  classes  of  creditors  whose  debts  are  of  the 
same  grade,  and  that  of  course  all  debts  of  the  same  grade 
must   come    in   on   an   equality.      If   that   be   so,    it   is   an 


I 


BELL  V.  NEWMAN  693 

effect  the  legislature  never  intended  to  produce.  They 
had  nothing  more  in  view  than  the  administration  of 
a  single  fund  among  its  own  peculiar  creditors.  The  first 
was  a  matter  easily  subjected  to  a  set  of  simple  rules;  but 
the  second  could  not  be  touched  by  a  hand  so  violent,  with- 
out throwing  the  whole  into  inextricable  confusion,  and 
destroying  all  justice  and  equitable  distinction.  Here  are 
two  funds  in  the  hands  of  the  representative  of  an  intestate 
who  held  them  in  distinct  characters.  As  a  surviving  part- 
ner he  was  not,  even  at  law,  the  owner  of  the  partnership 
property  in  possession;  and  although  as  to  choses  in  action 
the  remedy  survived  to  him,  still  to  a  share  of  these  also, 
the  representative  of  his  deceased  partner  was  entitled,  so 
soon  as  they  were  reduced  to  possession.  The  rule  allowing 
a  set-off  by  a  surviving  partner  of  a  partnership  demand 
against  a  separate  debt,  and  vice  versa,  which  appears 
in  contradiction  to  this  doctrine,  arises  from  technical 
principles  of  joinder  of  different  matters  in  the  same 
declaration;  and  is  an  anomaly  in  the  law.  If,  on  the 
death  of  a  surviving  partner,  the  partnership  fund  is  to 
be  blended  with  his  private  estate,  it  must  be  so  in  every 
instance,  and  to  every  purpose,  as  well  in  favour  of,  as 
against  the  separate  creditors.  Then,  in  case  the  separate 
estate  were  insolvent,  the  separate  creditors  would  come 
in  to  the  prejudice,  not  only  of  joint  creditors,  but  of  the 
representatives  and  creditors  of  the  deceased  partners,  also, 
who  would  be  burthened  with  the  surviving  partner's  debts 
in  every  case  of  a  deficiency.  It  is  impossible  to  say  the 
two  funds  shall  be  blended,  when  it  is  the  interest  of  the 
joint  creditors  to  have  them  so,  and  kept  separate  when 
circumstances  render  it  otherwise.  The  argument  is 
founded  on  the  notion,  that  the  surviving  partner  becomes 
the  entire  owner  of  the  partnership  fund  and  effects,  and 
is  only  personally  responsible  to  the  joint  creditors,  and 
representatives  of  his  deceased  partners;  which  is  wholly 
fallacious:  for  if  he  be  like  to  waste  the  stock,  chancery 
will   restrain   him    from  disposing  of   it,   or  receiving  the 


694  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

outstanding  debts.  Harts  v.  Schreder,  8  Ves.  jun.  317. 
The  legislature  never  could  intend  to  subject  the  property 
of  a  surviving  partner,  whether  owned  in  his  own  right, 
or  in  a  representative  capacity,  to  the  same  process  in  a 
course  of  administration:  nor  could  it  be  intended  that 
the  death  of  a  partner  should  effect  a  total  change  in  the 
rights  of  all  parties,  whether  partners  or  creditors.  I  am 
therefore  of  opinion  that  each  estate  is  liable  to  its  own 
debts  in  the  first  instance,  and  to  the  creditors  of  the  other, 
for  the  surplus,  if  there  be  any.^ 

lEach  of  the  three  members  of  the  Court  having  a 
different  opinion  as  to  the  proper  distribution,  the  assets 
were  distributed  in  accordance  with  opinion  of  Tilgh- 
man,   C.  J.]* 


'The  opinion  of  Duncan,  J.,  is  omitted.  He  took  the  position  that 
the  rights  at  law  and  under  bankruptcy  are  different,  and  that  the  joint 
creditors  should  share  equally  with  the  separate  creditors  on  the  sep- 
arate assets.    Compare:  Blair  v.  Black,  infra,  p. 

*  Compare:  M'Culloh  v.  Dashiell,  1  Md.  96,  1827.  _  (Archer,  J.: 
"It  is  difficult  to  say  upon  what  the  rule  in  equity  and  in  bankruptcy, 
with  the  modification  above  stated,  is  founded.  [The  rule  that  firm 
creditors  have  priority  on  firm  assets,  and  separate  creditors  on 
separate  assets,  except  where  there  are  no  firm  assets  and  no  solvent 
partner.]  The  joint  estate  is  benefited  to  the  extent  of  every  credit 
which  is  given  to  the  firm,  and  so  is  the  separate  estate  in  the  same 
manner  enlarged  by  the  debt  it  may  create  with  any  individual,  and  there 
would  be  unquestionably  a  clear  equity  in  confining  the  creditors  to 
each  estate  respectively,  which  has  thus  been  benefited  by  their  trans- 
actions. So  far  the  rule  is  sensible  and  intelligible ;  and  although  at 
law  the  joint  creditors  may  pursue  both  the  joint_  and  separate  estate, 
to  the  extent  of  each,  for  the  satisfaction  of  their  joint  demands,  which 
are  at  law  considered  both  joint  and  several,  without  the  possibility  of 
the  interposition  of  any  restraining  power  of  a  court  of  equity;  yet 
when,  by  the  death  of  one  of  the  parties,  the  legal  right  survives  against 
the  surviving  partner,  and  is  extinguished  against  the  deceased  partner, 
a  court  of  equity  will  give  to  the  separate  creditors  all  the  advantages 
thus  by  accident  thrown  upon  them,  and  will  not,  by  adopting  the  rig- 
orous rule  of  the  law  merchant,  thereby  injure  and  prejudice  the  sep- 
arate creditor,  upon  whom,  viewed  in  connexion  with  the  separate  fund, 
it  always  looks  upon  as  meritorious  and  entitled  in  the  distribution  of 
assets  to  the  preference.  But  although  a  court  of  equity,  as  against  the 
separate  creditors,  will  not  adopt  the  law  merchant,  which  considers 
the  contract  both  joint  and  several;  yet  whatever  doubts  have  hereto- 
fore been  entertained  on  the  subject,  where  the  claims  of  these  joint 
creditors  do  not  come  into  conflict  with  the  separate  creditors,  but  only 
with  the  interests  of  the  representatives  of  the  deceased  partner,  it  is 
now  undeniably  settled,  that  equity  will,  as  against  such  representatives, 
decree  to  joint  creditors  a  satisfaction  of  their  claims,  by  considering 
them,  as  they  are  considered  at  law,  both  joint  and  several. 


J 


BELL  V.  NEWMAN  695 

"But  although  these  distinctions  are  built  on  the  solid  foundations 
of  reason  and  justice,  it  is  not  altogether  so  easy  to  perceive,  why,  when 
there  is  no  joint  fund,  and  no  solvent  partner,  (by  no  solvent  partner  is 
meant  bankrupt  partner,)  the  joint  creditor  should  thereby  acquire 
the  equitable  right  of  coming  in  with  the  separate  creditors  pari  passu, 
upon  a  fund  in  no  manner  benefited  by  the  creation  of  his  debt.  Such, 
however,  is  the  settled  and  established  rule,  as  we  are  enabled  to  collect 
it  both  in  bankruptcy  and  in  equity ;  and  according  to  this  rule  -the 
complainant  could  not,  in  this  case,  be  permitted  to  seek  indemnity  for 
his  claim,  from  the  separate  estate  pari  passu  with  separate  creditors, 
as  it  is  a  conceded  fact  in  the  cause,  that  there  are  joint  funds,  although 
very  inconsiderable,  and  greatly  insufficient  to  pay  the  debt  of  the  com- 
plainant. 

"But  were  not  this  the  fact,  this  court  would  have  no  difficulty  in 
saying,  that  the  complainant  should  be  postponed  to  the  separate  cred- 
itors ;  and  that  whether  there  was  any  joint  estate  or  not,  he  should 
not  be  permitted  to  divide  with  the  separate  creditors  a  fund  insufficient 
to  pay  them.  We  are,  therefore,  disposed  to  adopt  the  ancient  rule  as 
more  consonant  to  equity  and  justice,  that  the  joint  creditors  can  only 
look  to  the  surplus,  after  the  payment  of  the  separate  debts;  and  on 
the  other  hand,  that  the  separate  creditors  can  only  seek  indemnity  from 
the  surplus  of  the  joint  fund  after  the  satisfaction  of  the  joint  cred- 
itors.") 


696  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 


BLAIR  V.  BLACK. 
In  the  Supreme  Court  of  South  Carolina,  1899. 

31  South  Carolina  Reports,  346.' 

The  opinion  of  the  Court  was  dehvered  by 
Mr.  Justice  McGowan  :  On  January  29,  1889, 
James  W.  Black  and  Jacob  K.  Carpenter,  of  the  old  mer- 
cantile firm  of  Black  &  Carpenter,  and  also  of  its  successor, 
Black,  Carpenter  &  Davies,  made  an  assignment  of  both 
their  individual  and  partnership  property,  for  the  payment 
of  their  debts,  to  John  G.  Black  as  assignee  and  trustee.  J. 
L.  Davies,  one  of  the  latter  firm,  did  not  sign  the  original 
deed  of  assignment,  being  absent  at  the  time  it  was  exe- 
cuted, but  ratified  it  some  days  later,  and,  indeed,  executed 
another  deed,  conforming  substantially  to  the  first.  The 
assignment  provided  that  the  property  and  assets  of  the 
individual  members  of  the  respective  finns  should  be  first 
applied  to  the  payment  of  the  individual  debts  of  the  mem- 
bers of  the  firm;  and  that  the  property  and  assets  of  the  firms 
respectively  should  be  first  applied  to  the  debts  of  the  part- 
nership; and  that  if  a  surplus  should  remain  after  paying 
the  debts  of  the  one  class,  then  such  surplus  should  be  paid 
to  debts  of  the  other  class,  and  so  reciprocally  of  the  other 
class.  The  assignment  also  provided,  that  if  there  should 
not  be  sufficient  funds  to  pay  the  debts,  the  assignee  should 
pay  them  ratably,  or  such  as  should,  within  thirty  days 
from  the  date  of  the  assignment,  agree  to  accept  the  terms 
of  it,  and  to  release  the  parties  from  all  liability  on  their 
debts  and  claims,  &c. 

The  cases  stated  above  were  instituted  by  creditors  of  the 
respective  firms  for  the  purpose  of  setting  aside  the  deed 
of  assignment,  and,  being  identical  in  object  and  purpose, 


^  The  opinion  of  Judge  Kershaw  in  the  lower  Court  is  omitted. 
Judge  Kershaw  took  the  position  that  the  separate  creditors  should 
have  priority  on  the  separate  assets. 


BLAIR  V.  BLACK  697 

were  consolidated  and  heard  together.  Several  grounds 
were  urged,  sufficient,  as  alleged,  to  set  aside  the  assign- 
ment and  subject  the  property  to  the  claim  of  creditors 
according  to  law,  but,  from  the  view  which  the  court  takes, 
it  will  not  be  necessary  to  consider  any  of  the  objections, 
except  the  one  chiefly  relied  on  by  the  assailing  creditors, 
viz.,  that,  in  violation  of  section  2014  of  the  General  Stat- 
utes, which  denounces  assignments  giving  preferences  as 
"absolutely  void,"  this  assignment  gives  undue  and  illegal 
preference  to  individual  over  copartnership  creditors,  in 
excluding  the  partnership  creditors  (after  exhausting  the 
partnership  assets)  from  coming  in  and  participating  with 
the  individual  creditors  in  the  individual  property  of  the 
members  of  the  different  firms ;  the  proposition  relied  on 
being,  that,  under  the  law  of  this  State,  the  individual 
creditors  are  not  entitled  to  be  paid  first  out  of  the  individual 
property,  but  have  only  an  equity  to  require  that  the  part- 
nership creditors  should  exhaust  the  assets  of  the  firm,  and 
after  that  is  applied,  they  are  entitled,  as  to  any  balance 
due  them,  to  share  equally  and  ratably  with  the  individual 
creditors  in  the  individual  assets.  While,  on  the  other  hand, 
in  support  of  the  assignment,  it  is  urged  that  the  rule  is,  that 
the  joint  debts  are  primarily  payable  out  of  the  joint  effects, 
r.nd  are  entitled  to  a  preference  over  separate  debts ;  and  so, 
in  the  converse  case,  the  separate  debts  are  primarily  pay- 
able out  of  the  separate  effects,  and,  as  to  that,  possess  a 
like  preference;  and  the  surplus  only,  after  satisfying  such 
priorities,  can  be  reached  by  the  other  class  of  creditors.  So 
that  really  the  only  question  involved  is  one  purely  of  lav/. 
What  was  the  law  of  this  State  upon  the  subject  when  the 
assignment  was  executed?^ 

The  question  is  certainly  an  important  one,  which  in 
the  affairs  of  business  life  may  arise  daily,  and  it  should  be, 
if  it  has  not  already  been,  clearly  and  fully  settled,  so  that 
all  mav  know  what  the  law  is  to  which  their  actions  should 


'That  part  of  the  opinion  in  which  he  refers  to  the  decision  of 
Judge  Kershaw,  sec  note  2,  supra,  is  omitted. 


698  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

be  conformed.  It  is  true  that  there  has  been  much  discus- 
sion, and  some  difference  of  opinion,  on  the  subject  involved, 
not,  as  is  seems  to  us,  arising  so  much  from  the  inherent 
difficulty  of  the  subject,  as  from  an  artificial  rule  originally 
adopted  in  the  English  Bankrupt  Courts  mainly,  as  it  would 
seem,  on  account  of  its  simplicity  and  convenience  of  appli- 
cation, viz.,  that  partnership  creditors  are  entitled  to  part- 
nership property,  and,  e  convcrso,  individual  creditors  are 
entitled  to  individual  property,  a  rule  of  which  Judge  Story 
says :  "It  is  not  too  much  to  say  that  it  rests  on  a  foundation 
as  questionable  and  unsatisfactory  as  any  rule  in  the 
whole  system  of  our  jurisprudence."     Story  Part,  577. 

As  we  understand  it,  no  rule  upon  the  subject  has  ever 
been  declared  by  positive  statute,  either  in  England  or 
America ;  but  whatever  rule  there  may  be  has  grown  up  en- 
tirely from  the  dicta  of  elementary  writers  and  adjudica- 
tions of  the  courts,  supposed  to  be  founded  on  some  prin- 
ciple. But  so  far  as  concerns  this  "rule  of  reciprocity," 
as  it  is  sometimes  called,  it  does  not  seem  to  us  to  have  been 
based  upon  any  principle  or  general  equities  of  the  parties. 
All  agree  that  the  partnership  creditors  have  an  equity  to 
exhaust  the  partnership  assets,  for  the  double  reason  that 
they  have  two  funds,  and  the  individual  members  have  no 
interest  until  the  partnership  is  settled.  But  the  same  can- 
not be  said  of  the  individual  creditors.  They  are  not  credi- 
tors of  the  firm  at  all,  but  only  of  their  individual  debtor, 
whose  individual  property,  including  his  clear  share  of  the 
firm,  is  liable  for  all  his  debts  alike,  both  partnership  and 
individual.  It  strikes  us  that  there  is  nothing  in  the  relations 
or  the  equities  of  the  respective  classes  to  authorize  or  justify 
the  application  of  the  convenient  Procrustean  rule  of 
"reciprocity." 

But  it  is  argued  that  the  Circuit  decree  is  in  conformity 
with  the  English  rule,  and  we  should  follow  it  without  re- 
gard to  its  reason  or  equity,  and  disregard  our  own  cases 
which  have  made  a  departure  from  it,  for  the  sole  reason 
that  it  was  error  to  make  that  departure,  and  it  should  be 


BLAIR  V.  BLACK  699 

corrected  by  returning  to  the  rule.  Without  going  back  to 
ascertain  what  is  the  precise  rule  adopted  in  the  English 
Courts  of  Bankruptcy  and  Chancery,  it  is  quite  clear  that 
as  far  back  as  the  case  of  Wardlaw  v.  Gray  (1837),  cited 
the  Circuit  decree,  the  doctrine  was  announced  in  tliis 
State  "that  a  partnership  creditor  has  the  right  to  resort 
either  to  the  partnership  property  or  to  the  separate  property 
of  the  parties;  but  as  a  party  having  two  funds,  he  may  be 
compelled  by  the  separate  creditors  of  one  of  the  partners 
to  exhaust  the  partnership  property  before  he  proceeds 
against  that  of  an  individual  partner,"  &c.  Whether  this 
decision  did  or  did  not  run  counter  to  what  is  said  to  be  the 
English  rule  upon  the  subject,  it  is  quite  as  clear  that  it  has 
never  been  expressly  overruled;  but,  on  the  contrary,  has 
been  recognized  and  followed,  and  at  the  time  of  the  execu- 
tion of  the  assignment  under  consideration  was,  as  we  think, 
the  law  of  the  State.  In  Gozvan  v.  Tunno  ct  aL,  Rich.  Eq. 
Cases,  369  (1832),  it  was  held  that  "though  partnership 
effects  should  be  first  applied  to  partnership  debts,  yet  after 
these  are  exhausted  a  judgment  against  the  partners  as  such 
binds  the  separate  estate  of  each  partner  from  its  date." 

In  Fleming  v.  Billings  &  Belk  (1856),  9  Rich.  Eq.,  149, 
it  was  held  that  "copartnership  creditors  are  first  to  be  paid 
out  of  the  copartnership  fund,  and  if  that  prove  insufficient, 
then  they  are  to  come  in  with  the  private  creditors  (respect 
being  had  to  liens)  as  against  the  individual  property  of  the 
copartners."  In  Gadsden  v.  Carson  et  aL,  9  Rich.  Eq.,  252 
(1857),  it  was  held  that  "the  individual  creditors  of  a  part- 
ner have  not  such  exclusive  right  to  be  paid  out  of  his  indi- 
vidual property  as  to  render  fradulent  an  assignment  of  it 
for  the  benefit  of  the  creditors  of  the  firm.  Partnership 
creditors  having  two  funds  to  which  they  can  resort,  and 
individual  creditors  of  the  partners  having  but  one — the  pri- 
vate property  of  the  debtor  (including  any  balance  which 
may  remain  to  him  from  the  firm,  after  its  affairs  are  set- 
tled)— such  individual  creditors  have  an  equity  to  compel 
the  partnership  creditors  to  resort  first  to  the  partnership 


700  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

assets ;  but  after  they  are  exhausted,  the  partnership  credit- 
ors have  as  good  right  to  be  paid  out  of  the  private  property 
of  a  partner  as  his  individual  creditors,"  &c.  In  this  case 
Chancellor  Johnston  remarked  that  it  "was  in  conformity  to 
Wardlaw  v.  Gray,  with  which  we  see  no  reason  to  be  dis- 
satisfied." 

In  JVilson  v.  McConncll,  g  Rich.  Eq.,  500  (1857),  it 
was  held  that  "where  a  copartner,  having  a  separate  estate, 
dies,  the  copartnership  creditors  have  the  right  first  to  ex- 
haust the  copartnership  estate,  and  if  that  proves  insufficient 
to  pay  their  demands,  then  they  are  to  be  paid  from  the 
separate  estate  of  the  copartners  pro  rata  with  his  separate 
creditors."  In  Adickcs  v.  Lowry,  15  S.  C,  128  (1880),  it 
is  true  that  an  intimation  is  given  that  the  question  might 
be  still  open,  but  that  was  not  intended  to  decide  anything. 
The  remark  was:  "But  even  if  this  were  so,  there  would 
still  remain  the  very  important  and  interesting  question, 
whether  the  separate  creditors  of  Bratton  would  not  have  in 
equity  a  preference  over  the  partnership  creditors  to  the 
separate  assets  of  Bratton,  &c.  But  inasmuch  as  this  ques- 
tion was  not  raised  in  the  court  below,  and  has  not  been  ar- 
gued here,  we  do  not  propose  to  enter  upon  its  consideration 
now,"  &c. 

In  Hiitzlcr  Bros.  v.  Phillips,  26  S.  C,  136  (1886),  it 
was  held  "that  partnership  creditors,  after  exhausing  part- 
nership assets,  are  entitled  to  share  the  separate  property 
of  the  partners  pro  rata  with  unsecured  individual  credi- 
tors." The  Chief  Justice  reviewed  all  the  authorities,  say- 
ing, among  other  things :  "We  think  the  true  doctrine  is  as 
stated  by  the  Circuit  Judge  with  respect  to  the  right  of  the 
separate  creditors,  if  any  equity  exists  in  his  behalf,  such 
as  two  funds,  *  *  *  ^q  throw  the  copartnership 
creditors  on  the  partnership  assets  in  the  first  instance,  but 
after  the  partnership  assets  have  been  fully  and  fairly  ex- 
hausted, to  come  in  pro  rata  with  the  separate  creditor.  This 
seems  to  be  the  weight  of  authority  with  us.  Besides,  a  debt 
contracted  by  a  copartnership  is  not  only  a  debt  of  the  firm, 


BLAIR  V.  BLACK  701. 

but  a  debt,  in  substance,  of  each  individual  member  of  the 
firm,  and  the  property  of  the  firm  and  of  each  member  is 
liable  for  it.  But  the  property  of  the  firm  is  not  liable  for 
the  separate  debt  of  a  member;  only  the  interest  of  a  mem- 
ber is  liable,  which  is  nothing  until  the  firm  debts  are  paid," 

&c. 

We  think  this  case  finally  settled  the  law  in  this  State. 
But,  as  if  to  put  the  matter  beyond  all  dispute,  the  very  last 
work  upon  the  subject  of  partnership,  published  this  year 
(1889),  expressly  approves  and  cites  from  this  case,  as  con- 
taining the  proper  exposition  of  the  law  upon  the  subject, 
both  on  principle  and  authority.  The  author  says :  "The 
insolvent,  by  his  inability  to  meet  his  liabilities,  is  not  the 
less,  but  all  the  more,  a  debtor.  He  owes  to  his  creditors 
not  the  property  itself,  nor  any  other  asset,  but  merely  the 
price  of  the  property.  The  debt  is  personal,  without  any 
lien  or  preference  for  its  payment  out  of  the  debtor's  estate. 
The  individual  partner  is,  however,  not  less  liable  for  a 
firm  debt  than  is  the  firm  itself.  The  several  liability  of  the 
partners  is  no  less  a  constituent  of  the  partnership  obligation 
than  is  their  joint  obligation.  Both  spring  from  the  root  of 
partnership.  The  joint  creditors,  therefore,  are  entitled  at 
law  to  share  the  separate  estate  of  a  partner  with  his  indi- 
vidual creditors,"  &c.  See  Parsons  on  "Principles  of  Part- 
nership," section  108,  citing  Hutsler  Bros.  v.  Phillips,  and 
other  cases. 

We  have  not  the  least  idea  that  the  parties  intended  to 
do  anything  wrong,  but  the  assignment  was  not  in  conform- 
ity with  the  law  as  we  understand  it,  and  had  the  effect  of 
creating  preferences  not  allowed  by  law. 

The  judgment  of  this  Court  is,  that  the  judgment  of  the 
Circuit  Court  be  reversed,  and  the  cases  remanded  to  the 
Circuit  Court  for  such  further  proceedings  as  the  parties  may 
be  advised,  in  accordance  with  the  conclusions  herein  an- 
nounced.' 


^  Note  the  following  statement  by  Judge  Lowell,  in  /;;  ;r  Wilcox,  94 
Fed.  84,  1899,  p.  102 :  "The  general  rule  [that  firm  creditors  have 
priority  on  firm  assets,  and  separate  creditors  on  separate  assets]   has 


702  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

been  followed  or  recognized  in  Mississippi  (Oakey  v.  Rabh's  Ex'rs, 
Freem.  Ch.  546;  Irby  v.  Graham,  46  Miss.  425  430,  432);  in  Nebraska 
{Bowen  v.  Billings,  13  Neb.  439,  443,  14  N.  W.  152)  ;  in  Iowa  {Hubbard 
V.  Curtis,  8  Iowa,  i  ;  Miller  v.  Clarke,  37  Iowa,  325)  ;  in  IMinnesota  (Iz'es 
V.  Mahoney,  Ji  N.  W.  720)  ;  in  Tennessee  {Fozvlkcs  v.  Bowers'  Heirs, 
ir  Lea,  144).  In  none  of  these  states  has  there  been  found  a  case 
which  deals  with  the  exception  in  the  absence  of  joint  estate.  Both 
the  rule  and  the  exception  have  been  recognized  in  Alabama  (Smith  v. 
Mallory's  Ex'r,  24  Ala.  628;  I'an  Jl'agner  v.  Chapman's  Adm'r,  29  Ala. 
172;  Evans  v.  Winston,  74  Ala.  349)  ;  in  New  Jersey  (Davis  v.  Howell, 
3S  N.  J.  Eq.  '72)  ;  in  Illinois  (Rainey  v.  Nance,  54  111.  29;  Young  v.  Clapp, 
147  111.  176,  32  N.  E.  187,  and  35  N.  E.  372;  Ladd  v.  Griswold,  4  Oilman, 
25,  39);  in  Missouri  (Level  v.  Farris,  24  Mo.  App.  445;  Hundley  v. 
Earns,  103  Mo.  7'^,  15  S.  W.  312)  ;  in  Rhode  Island  (Colwell  v.  Bank. 
16  R.  I.  288,  290,  15  Atl.  80,  and  17  Atl.  913 ;  Pearce  v.  Cooke,  13  R.  I. 
184)  ;  in  Wisconsin  (Thayer  v.  Humphrey,  91  Wis.  276,  64  N.  W.  1007)  ; 
in  Maine  (Harris  v.  Peabody,  73  Me.  262).  The  exception  has  been 
somewhat  doubtfully  recognized  in  Georgia  (Toombs  v.  Hill,  28  Ga. 
371;  Keese  V.  Coleman,  72  Ga.  658).  The  rule  has  been  recognized,  and 
the  exception  disapproved,  in  Indiana  (Weyer  v.  Thornburgh,  15  Ind. 
124;  Warren  v.  Able,  91  Ind.  107;  Warren  v.  Farmer,  100  Ind.  593),  and 
in  Massachusets  (Potters  Works  v.  Minot,  10  Gush.  592).  In  New 
Hampshire  the  rule  has  been  recognized,  and  the  exception  declared  to 
be  unreasonable,  though  it  is  established  in  bankruptcy.  If  there  be  no 
preference  where  there  is  no  joint  estate,  it  is  said  by  the  court  that 
there  should  be  no  preference  where  there  is  no  separate  estate.  Weaver 
V.  Weaver,  46  N.  H.  188,  192.  In  Ohio  the  rule  was  disapproved  in 
principle,  though  admitted  to  be  established  in  bankruptcy,  in  Grosvener 
V.  Austin's  Adm'rs,  6  Ohio  104.  In  Rodgers  v.  Meranda,  7  Ohio  St.  179, 
both  the  rule  and  the  exception  were  approved.  In  Brock  v.  Bateman, 
25  Ohio  St.  609,  where  the  joint  estate  was  not  sufficient  to  pay  the 
costs,  the  exception  was  allowed  to  operate,  and,  in  the  confusion  of 
mind  caused  by  an  attempt  to  reconcile  the  theory  of  the  exception  with 
the  theory  of  the  rule,  the  court  declined  to  say  what  would  happen 
where  the  partnership  assets  would  yield  to  the  joint  creditors  less  than 
the  separate  assets  would  yield  to  the  separate  creditors.  Plainly,  the 
court  was  inclined  to  reduce  the  rule  to  a  mere  marshaling  of  assets.  In 
Kentucky  it  appears  to  be  established  that  the  joint  creditor  may  waive 
his  right  to  proceed  against  the  joint  estate,  and,  if  he  does  so,  may 
share  equally  with  the  separate  creditor  in  both  joint  and  separate 
estate ;  otherwise,  the  separate  creditor  receives  from  the  separate 
estate  as  large  a  dividend  as  the  joint  creditor  has  received  from  the 
joint  estate,  and  thereafter  joint  and  separate  creditors  are  paid  pro  rata 
from  the  separate  estate.  Bank  v.  Kei::er,  2  Duv.  169.  The  general 
rule  has  been  disapproved  in  Vermont.  The  numerous  exceptions  in- 
grafted thereon,  it  is  said,  show  that  the  rule  rests  on  no  satisfactory 
basis.  Bardivell  v.  Perry,  19  Vt.  292.  It  has  been  disapproved  in  Con- 
necticut (Camp  v.  Grant,  21  Conn.  41),  and  in  Virginia  (Pettyjohn  y. 
Woodroof,  10  S.  E.  715).  In  Kansas  the  matter  seems  to  be  left  in 
some  doubt.  Fullum  v.  Abrahams,  29  Kan.  725.  The  list  above  given 
is  not  supposed  to  be  exhaustive,  but  it  represents  with  some  fulness 
the  rule  of  distribution  as  administered  in  the  courts  of  equity  of 
the  several  states.  It  should  be  added  that  some  of  the  decisions  above 
cited  rest  upon  the  language  of  particular  statutes,  as  well  as  upon 
general  principles  of  law." 

In  Black's  App.,  44  Pa.  503,  1863,  the  Supreme  Court  of  Pennsyl- 
vania, on  a  bill  in  equity,  approved  the  rule,  expressly  pointing  out  that 
the  exception,  permitting  the  joint  creditors  to  come  in  pari  passu  with 
the  separate  creditors  on  the  separate  assets  where  there  was  no  joint 
estate  and  ro  solvent  partner,  was  not  before  them.    See  p.  507. 


5AXKRUPT  ACT  OF  1898  703 


BANKRUPT  ACT  OF  1898. 

Chapter  III,  Section  5,  Partners. 

a  A  partnership,  during  the  continuation  of  the  partner- 
ship business,  or  after  its  dissolution  and  before  the  final 
settlement  thereof,  may  be  adjudged  a  bankrupt. 

h  The  creditors  of  the  partnership  shall  appoint  the 
trustee ;  in  other  respects  so  far  as  possible  the  estate  shall  be 
administered  as  herein  provided  for  other  estates. 

c  The  court  of  bankruptcy  which  has  jurisdiction  of 
one  of  the  partners  may  have  jurisdiction  of  all  the  partners 
and  of  the  administration  of  the  partnership  and  individual 
property. 

d  The  trustee  shall  keep  separate  accounts  of  the  part- 
nership property  and  of  the  property  belonging  to  the  indi- 
vidual partners. 

e  The  expenses  shall  be  paid  from  the  partnership 
property  and  the  individual  property  in  such  proportions  as 
the  Court  shall  determine. 

/  The  net  proceeds  of  the  partnership  property  shall 
be  appropriated  to  the  payment  of  the  partnership  debts,  and 
the  net  proceeds  of  the  individual  estate  of  each  partner  to 
the  payment  of  his  individual  debts.  Should  any  surplus 
remain  of  the  property  of  any  partner  after  paying  his  in- 
dividual debts,  such  surplus  shall  be  added  to  the  partner- 
ship assets  and  be  applied  to  the  payment  of  the  partnership 
debts.  Should  any  surplus  of  the  partnership  property  re- 
main after  paying  the  partnership  debts,  such  surplus  shall 
be  added  to  the  assets  of  the  individual  partners  in  the  pro- 
portion of  their  respective  interests  in  the  partnership. 

g  The  court  may  permit  the  proof  of  the  claim  of  the 
partnership  estate  against  the  individual  estates,  and  vice 
versa,  and  may  marshal  the  assets  of  the  partnership  estate 
and  individual  estates  so  as  to  prevent  preferences  and  se- 


704  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

cure  the  equitable  distribution  of  the  property  of  the  several 
estates. 

h  In  the  event  of  one  or  more  but  not  all  of  the  mem- 
bers of  a  partnership  being  adjudged  bankrupt,  the  partner- 
ship property  shall  not  be  administered  in  bankruptcy,  unless 
by  consent  of  the  partner  or  partners  not  adjudged  bank- 
rupt; but  such  partner  or  partners  not  adjudged  bankrupt 
shall  settle  the  partnership  business  as  expeditiously  as  its 
nature  will  permit,  and  account  for  the  interest  of  the 
partner  or  partners  adjudged  bankrupt.^ 

*  The  following  propositions  have  been  taken  from  Collier  on  Bank- 
ruptcy. The  references  are  to  the  pages  of  the  ninth  edition,  where  the 
student  will  find  a  full  citation  of  authorities. 

1.  A  partnership  is  in  bankruptcy  a  legal  entity.     Page  115. 

2.  A  partnership  may  be  adjudged  bankrupt,  although  the 
partners  who  compose  it  are  not  so  adjudicated.     Page  116. 

3.  The  firm  must  petition  or  be  petitioned  against ;  if  the 
latter,  the  firm,  or  a  member  of  it  acting  within  the  scope  of  the 
partnership,  must  have  committed  an  act  of  bankruptcy,  and  if 
adjudication  follows,  the  firm,  eo  nomine,  must  be  adjudicated. 
Page   116. 

4.  In  determining  the  question  of  insolvency,  the  individual 
property  of  the  partners  should  be  considered,  and  where  the  assets 
of  a  partnership,  together  with  the  individual  properties  of  each 
partner,  exceed  their  liabilities  the  partnership  is  not  insolvent. 
Page  119. 

5.  If  all  the  partners  petition  voluntarily,  the  proceeding  prior 
to  adjudication  is  identical  with  an  individual  petition.  If  the  pe- 
tition be  involuntary,  and  insolvency  is  necessary  to  the  act,  it 
must  appear  affirmatively  that  both  the  partnership  as  an  entity 
and  the  individuals  composing  it  were  and  are  insolvent.     Page  122. 

6.  It  has  been  held,  following  the  entity  doctrine,  that  where 
the  partners  petition,  separate  petitions  must  be  filed  by  the  firm 
and  by  the  individuals.  T'  better  opinion  is,  however,  to  the 
contrary,  viz,  that  but  one  petition  need  be  filed.     Page  122. 

7.  If  the  adjudication  is  of  the  firm  only,  the  discharge  follow- 
ing it  will  be  a  bar  only  to  firm  debts.  If  the  application  is  for 
individual  bankruptcies  only  the  discharge  will  not  affect  firm 
liabilities.     Page  125. 

8.  Where  there  are  no  firm  assets  and  the  firm  creditors  are 
duly  scheduled  and  receive  notice,  there  is  a  conflict  of  authority  as 
to  whether  the  individual  discharge  of  a  bankrupt  partner  should 
operate  as  a  discharge  of  the  bankrupt  from  the  partnership  debts. 
Pages  126,  127. 

The  appareni  contradiction  between  some  of  the  foregoing  propo- 
sitions is  evidently  in  part  due  to  the  partial  adoption  of  the  entity 
theory  of  a  partnership  by  the  Act  of  1898.  On  this  point,  see  the  fol- 
lowing language  of  Lowell,  J.,  In  re  Forbes.  11  Am.  B.  R.  787,  P- 
789:  "For  some  purposes  a  partnership  has  been  treated  as  an  entity 
apart  from  the  partners;  for  other  purposes  it  has  been  treated  as  a 
congeries  of  partners.  Some  courts  have  suggested  that  the  Act  of 
1898  has  adopted  for  bankruptcy  the  theory  of  an  entity  separate  from 


BANKRUPT  ACT  OF  1898  70S 

the  partners.  Section  i  (19).  5a;  /n  re  Meyer,  3  Am.  B.  R.  559,  98 
Fed.  976;  In  re  Mercur,  11  Am.  B.  R.  505,  122  Fed.  384.  Yet  this 
treatment  of  a  partnership  is  irreconcilable  with  other  provisions  of 
the  statute.  Section  5h  of  the  act  provides  that  the  partnership  prop- 
erty (except  in  case  of  consent)  shall  not  be  administered  in  bank- 
ruptcy unless  all  the  partners  are  adjudged  bankrupt.  This  is,  in  effect, 
a  provision  that  the  partnership  shall  not  be  made  bankrupt  except  by 
an  adjudication  of  all  its  partners.  Adjudication  without  accompanying 
distribution  of  the  bankrupt  estate  would  be  worse  than  a  vain  form, 
for  it  would  confuse  inextricably  questions  of  preference,  lien,  attach- 
ment, and  the  like.  The  remedy  given  by  clause  'h'  to  the  trustee  is, 
in  substance,  the  equitable  remedy  found  so  unsatisfactory  in  the  days 
of  Lord  Eldon.  See  In  re  wiicox  (D.  C),  2  Am.  B.  R.  117,  94  Fed. 
84.  95.  The  negative  provision  of  clause  'h'  is  more  definite  than  the 
affirmative  provision  of  clause  'a,'  which  does  not  declare  under  what 
circumstances  the  adjudication  of  a  partnership  shall  be  made,  or  what 
shall  be  its  form  or  effect.  Section  5b  contemplates  that  the  adjudica- 
tion under  a  joint  petition  shall  be  both  joint  and  several.  If  the  ad- 
judication were  joint  only,  there  would  be  no  object  in  providing  that 
the  joint  creditors  alone  shall  elect  the  trustee.  Still  again,  section  5c 
gives  to  the  court  which  has  jurisdiction  of  one  partner  'jurisdiction 
of  all  the  partners,'  and  says  nothing  about  jurisdiction  of  the  partner- 
ship as  an  entity.  Read  as  a  whole,  Form  2  [the  official  form  pre- 
scribed by  the  Supreme  Court  of  the  United  States  for  the  voluntary 
partnership  petition]  agrees  with  section  5h,  and  not  with  the  theory 
of  entity.  It  is  in  terms  the  petition  of  individuals.  It  sets  out  that 
'they'  owe  debts  which  'they'  cannot  pay  and  that  'they'  desire  the 
benefits  of  the  Bankrupt  Act.  The  joint  debts  are  styled  'the  debts  of 
said  partners,'  not  the  debts  of  the  firm,  and  the  joint  assets  'the  prop- 
erty, real  and  personal,  of  the  said  partners.'  It  is  true  that  the  last 
paragraph  of  the  petition  contains  a  prayer  that  'the  firm  may  be  ad- 
judged by  a  decree  of  the  court  to  be  bankrupts,'  but  the  use  of  the 
plural  shows  that  the  word  'firm'  is  there  a  collective  noun,  as  further 
appears  from  the  fact  that  the  prayer  is  obviously  intended  to  cover 
a  separate  as  well  as  a  joint  adjudication. 

"But  the  rule  that  there  can  be  no  bankruptcy  of  a  partnership 
without  bankruptcy  of  all  the  partners  (save  exceptional  cases  such 
as  In  re  Dunnlgan  [D.  C]  2  Am.  B.  R.  628,  95  Fed.  428,  and  the  like) 
is  based,  not  so  much  upon  a  nice  examination  of  the  words  of  the 
particular  statute,  as  upon  general  principles  of  law.  The  equal  and 
equitable  distribution  of  the  estates  of  insolvents  and  their  discharge 
from  the  obligation  of  their  debts  are  the  ends  sought  by  proceedings 
in  bankruptcy.  Bankruptcy  without  insolvency,  actual  or  presumed, 
is  almost  inconceivable.  Bankruptcy  without  discharge  for  the  honest 
debtor  is  a  contradiction  in  terms.  It  is  impossible  to  declare  a  part- 
nership insolvent  so  long  as  the  partners  are  able  to  pay  its  debts  and 
theirs,  whether  out  of  joint  or  separate  estate,  and  so  the  courts  have 
generally  held  that  a  partnership  is  not  insolvent  unless  by  the  in- 
solvency of  all  its  partners.  See  Vaccaro  v.  Bank  of  Meinpliis,  4  Am. 
B.  R.  474,  103  Fed.  436,  43  C.  C.  A.  279;  In  re  Blair  (D.  C),  3  Am.  B. 
R.  568,  99  Fed.  76;  Davis  v.  Stevens  (D.  C),  4  Am.  Br.  R.  763,  104 
Fed.  235.  Not  the  insolvency  of  any  imaginary  entity,  as  in  the  case 
of  a  corporation,  but  the  insolvency  of  its  human  component  parts,  lies 
at  the  foundation  of  the  bankruptcy  of  a  partnership.  Those  who  bring 
an  involuntary  joint  petition  must  certainly  prove  this,  and  by  the 
principles  of  sound  pleading  and  the  analog^'  of  Form  No  2  they  must 
allege  it.  As  the  bankruptcy  of  a  partnership  begins  with  an  inquiry 
into  the  condition  of  its  individual  partners,  the  end  of  the  proceedings 
is  normally  their  discharge.  So  far  as  I  know,  the  discharge  of  a  part- 
nership as  an  entity  has  never  been  suggested,  and  what  would  be  the 


706  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

effect  of  such  a  discharge  can  hardly  be  imagined.  Herein  appears  the 
difference  between  a  partnership  and  a  corporation.  Under  an  adjudi- 
cation merely  joint,  it  is  impossible  to  discharge  the  partners  as  indi- 
viduals, even  from  their  joint  debts,  for  every  joint  debt  of  the  part- 
nership is  also  a  separate  debt  of  each  partner,  and  separate  debts  can 
be  discharged  only  after  an  individual  adjudication  operating  upon  the 
separate  estate.  For  these  reasons,  this  court  of  bankruptcy  has  con- 
sistently refused  to  make  the  adjudication  of  a  partnership,  unless  all 
the  partners  be  adjudged  bankrupts  at  the  same  time.  The  confusion 
which  inevitably  results  from  any  other  rule  is  abundantly  illustrated 
by  the  reports.  Whether  an  adjudication  of  all  the  i^artners  upon 
separate  petitions  carries  an  administration  of  the  partnership  estate 
need  not  be  decided  here.  This  may  be  implied  from  section  sh,  but 
the  implication  is  not  s'  ong.  See  In  re  Mercur,  ii  Am.  B.  R.  505,  122 
Fed.  384,  58  C.  C.  A.  472." 

As  to  whether  an  adjudication  of  all  the  partners  upon  separate 
petitions  carries  with  it  an  administration  of  the  partnership  estate  see 
the  opinion  of  Sulzberger,  J.,  Iron  Company  v.  Mercur,  30  Pa.  C.  C. 
406,  1904.  (A  and  B,  partners,  made  a  voluntary  assignment  for  benefit 
of  creditors.  Subsequently  each  separately  were  adjudicated  bankrupt 
and  received  their  discharges.  Held,  in  a  subsequent  suit  against  the 
partnership,  that  these  discharges  could  not  be  set  up  as  a  defence.) 


IN  RE  WILCOX  70/ 


In  re  WILCOX. 

In  the  United  States  District  Court  for  the  Dis- 
trict OF  Massachusetts,  1899. 

94  Federal  Reporter,  84. 

In  Bankruptcy.     On  review  of  ruling  of  referee. 

The  certificate  of  the  referee  (Henry  J.  Field,  referee 
in  bankruptcy  for  Franklin  County,  Mass.)  was  as  follows: 
"The  bankrupt,  three  or  four  years  ago,  was  a  member 
of  a  partnership  at  Lincoln,  Nebraska.  The  other  member 
of  the  firm  left,  with  all  the  funds;  and  she  set  herself  about 
to  pay  up  the  partnership  debts,  in  which  she  succeeded  so 
far  as  to  pay  all  of  them  except  the  one  in  question,  amount- 
ing to  $1,000,  besides  accrued  interest,  which  was  presented 
for  proof  against  her  individual  estate  in  bankruptcy,  and 
allowed.  Upon  the  question  whether  such  creditor  of  a 
former  partnership  should  share  pro  rata  with  the  individual 
creditors,  I  ruled  that  as  no  evidence  appeared  showing  that 
there  are  any  assets  of  said  partnership,  and  there  was  some 
evidence  that  there  are  none,  under  the  law  such  creditor 
is  entitled  to  share  with  the  individual  creditors ;  that  is,  pro 
rata." 

The  case  was  submitted  to  the  judge  without  argument. 

Lowell,  District  Judge :  Thus  far  the  history  of  the 
development  in  this  country  of  the  rule  of  distribution  has 
been  considered  apart  from  the  bankrupt  acts.^  The  explicit 
provisions  of  these  acts  and  their  construction  by  the  courts 
remain  to  be  dealt  with.  The  bankrupt  act  of  1800  (2  Stat. 
19),  contained  no  reference  to  the  distribution  of  the  assets 
of  a  partnership  and  its  component  partners,  and,  except 

'  The  editors  omit,  on  account  of  its  great  length,  the  first  part  of 
the  opinion  of  Judge  Lowell  with  regret.  It  is  an  invaluable  monograph 
on  the  history  both  in  England  and  America  of  the  rule  of  the  distribu- 
tion in  bankruptcy  and  equity  of  partnership  and  individual  assets.  The 
editors  have  received  great  assistance  from  it  in  the  work  of  arranging 
the  preceding  cases  and  notes  in  this  chapter. 


708  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

Tucker  V.  Oxley,  no  decision  made  under  that  act  has  been 
found  which  bears  upon  the  question.  xA.ct  1841,  Section  14 
(5  Stat.  448),  reads  in  part  as  follows : 

"The  assignees  shall  also  keep  separate  accounts  of  the 
joint  stock  or  property  of  the  company,  and  of  the  separate 
estate  of  each  member  thereof;  and  after  deducting  out  of 
the  whole  amount  received  by  such  assignees  the  whole  of 
the  expenses  and  disbursements  paid  by  them,  the  net  pro- 
ceeds of  the  joint  stock  shall  be  appropriated  to  pay  the 
creditors  of  the  company,  and  the  net  proceeds  of  the  sepa- 
rate estate  of  each  partner  shall  be  appropriated  to  pay  his 
separate  creditors;  and  if  there  shall  be  any  balance  of  the 
separate  estate  of  any  partner,  after  the  payment  of  his  sepa- 
rate debts,  such  balance  shall  be  added  to  the  joint  stock,  for 
the  payment  of  the  joint  creditors ;  and,  if  there  shall  be  any 
balance  of  the  joint  stock,  after  payment  of  the  joint  debts, 
such  balance  shall  be  divided  and  appropriated  to  and  among 
the  separate  estates  of  the  several  partners,  according  to 
their  respective  rights  and  interests  therein,  and  as  it  would 
have  been  if  the  partnership  had  been  dissolved  without  any 
bankruptcy;  and  the  sum  so  appropriated  to  the  separate 
estate  of  each  partner  shall  be  applied  to  the  payment  of  his 
separate   debts." 

This  provision,  it  will  be  seen,  recognizes  the  general 
rule  of  distribution,  and  says  nothing  about  any  exception 
thereto.  In  re  Marwick  (1845),  -  Ware,  229,  Fed.  Cas. 
No.  9,  181,  there  was  no  joint  fund  except  $40,  paid  by  a 
separate  creditor  for  a  worthless  asset  in  order  to  create  a 
nominal  joint  estate,  and  so  to  prevent  the  joint  creditors 
from  coming  upon  the  separate  estate.  Judge  Ware  said: 
*Tt  has  hitherto  been  found  impracticable  to  establish  any 
general  rule  that  will  meet  the  equities  of  all  the  various 
cases  that  come  up  in  practice;  and  the  courts  have  been 
finally  compelled,  instead  of  subjecting  the  whole  to  a  rigor- 
ous analysis,  and  extracting  a  system  of  rules  which  will 
carry  out  the  principles  of  natural  justice,  to  cut  down  the 
difficulties   by   establishing   a   general    rule,    which   at   first 


IN  RE  WILCOX  709 

seems  conformable  to  general  equity,  and  then  to  limit  and 
qualify  it  by  a  number  of  arbitrary  exceptions,  in  order  to 
meet  the  particular  equities  of  particular  cases.  This  system 
is  admitted  to  be  not  entirely  satis  factory.  It  has  sometimes 
been  departed  from,  and  again  restored,  and  is  now  adhered 
to,  not  because  it  is  in  all  respects  conformable  to  the  prin- 
ciples either  of  positive  law  or  of  natural  equity,  but  partly 
as  a  rule  of  convenience,  as  it  has  been  sometimes  called,  and 
partly  because  no  system  has  been  hitherto  presented  as  a  sub- 
stitute which  is  not  found  to  be  encountered  by  equal  diffi- 
culties."   2  Ware,  233,  Fed.  Cas.  No.  9,  181. 

After  saying  that  the  general  rule  is  based  upon  the 
theory  of  credit  given  to  the  different  estates,  the  learned 
judge  continued :  "The  general  rule  therefore  has  its  foun- 
dation in  natural  equity,  and  it  is  established  b}^  the  law. 
The  law  itself  makes  no  exception.  Now,  admitting  the  case 
of  there  being  no  joint  estate  to  be  a  casus  omissus,  not  con- 
templated, and  therefore  not  within  the  purview  of  the  law, 
it  certainly  covers  all  cases  where  there  is  a  joint  fund,  with- 
out inquiring  into  its  origin.  And  it  is  a  rule  in  the  construc- 
tion of  statutes  that,  when  the  statute  covers  the  whole  case 
in  all  its  circumstances,  and  makes  no  exceptions,  none  can 
be  made  by  the  court."    2  Ware,  235,  Fed.  Cas.  No.  9,181. 

It  will  be  perceived  that  the  learned  judge  approved  the 
general  rule,  disapproved  the  exception  on  principle,  doubt- 
fully recognized  it  upon  authority,  and  avoided  its  effect  by 
permitting  its  flagrant  evasion. 

Act  1867,  section  36  (Rev.  St.  Section  5121),  is,  in  all 
essentials,  the  same  as  section  14  of  the  act  of  1841.  hi  re 
Downing  (1870)  Fed.  Cas.  No.  4,044,  Judges  Dillon  and 
Krekel  held  that  the  provision  for  distribution  made  by  the 
act  of  1867  "^li*^!  "ot  apply  where  the  commission  was  sepa- 
rate. The  decision  was  rested  largely  upon  section  27  of  the 
act  of  1867  (Rev.  St.  section  5091),  which  provides  that 
"all  creditors  whose  debts  are  duly  proved  and  allowed  shall 
be  entitled  to  share  in  the  bankrupt's  property  and  estate  pro 
rata,  without  any  priority  or  preference  whatever"    (with 


710  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

certain  immaterial  exceptions).  In  re  Knight  (1871)  2 
Biss.  518,  Fed.  Cas.  No.  7,880,  Judge  Drummond  seems  to 
have  followed  In  re  Downing,  though  it  is  a  little  hard  to 
say  whether  he  meant  to  declare  that,  under  a  separate  com- 
mission, joint  creditors  could  come  ratably  with  the  separate 
creditors  upon  the  separate  estate,  even  where  there  was 
joint  estate  (as  would  be  the  case  if  Rev.  St.  section  5 121, 
and  the  general  rule  had  no  application  to  a  seperate  com- 
mission), or  meant  to  let  them  come  upon  the  separate  estate 
only  where  there  was  no  joint  estate.  See  In  re  Goedde,  6 
N.  B.  R.  295,  Fed.  Cas.  No.  5,500. 

In  re  Pease,  13  N.  B.  R.  168,  Fed.  Cas.  No.  10,881, 
Judge  Nelson,  of  Minnesota,  held  that  Rev.  St.  section  5 121, 
was  wholly  inapplicable  in  the  case  of  a  separate  commission, 
saying:  "We  thus  have  a  firm  dissolved,  no  assets,  and  all 
the  partners  insolvent  and  in  bankruptcy,  without  any  volun- 
tary or  inz'ituni  proceedings  being  instituted  to  declare  them 
bankrupt  as  a  firm.  Under  such  circumstances,  in  my  opin- 
ion, the  individual  creditors  of  Pease  have  no  prior  rights  to 
the  creditors  of  the  old  firm  of  which  he  was  a  member. 
Their  claims  have  been  duly  proved,  and  they  are  entitled  to 
share  pro  rota  with  the  other  creditors.  The  equity  rule  in 
regard  to  the  rights  of  firm  and  individual  creditors  does  not 
apply,  for  the  reason  that  no  proceedings  have  been  insti- 
tuted against  the  partnership  under  section  5 121  of  the  Re- 
vised Statutes." 

In  re  Lloyd  (1884),  22  Fed.  88,  Judge  Atchison  ap- 
parently agreed  with  In  re  Knight,  though  the  decision  went 
upon  another  question.  See,  also,  U.  S.  v.  Lewis,  13  N.  B. 
R.  33,  Fed.  Cas.  No.  15,595.  These  decisions  are  a  return 
— apparently  quite  unconscious — to  the  bankruptcy  practice 
of  Lord  Thurlow,  and  to  his  distinction  between  joint  and 
separate  commissions,  but  apparently  without  that  remedial 
intervention  of  equity  which,  under  Lord  Thurlow,  made 
the  exception  in  bankruptcy  practically  inoperative. 

In  r^  Jewett  (1868),  Fed.  Cas.  No.  7,304,  Judge  Drum- 
mond confirmed  the  decision  of  the  register,  which  held  that 


IN  RE  WILCOX  711 

the  exception  in  the  absence  of  joint  assets  was  apphcable 
under  the  statute.  In  re  Slocum,  Fed.  Cas.  Nos.  12,950, 
I2,g^i,  Judge  Wheeler,  and,  upon  appeal.  Judge  Blatchford, 
held  that  the  exception  in  the  absence  of  joint  estate  was 
applicable  under  the  statute  of  1867;  and  this  even  where 
there  were  joint  assets  insufficient  to  pay  the  expense  of 
realizing  them.  No  reasons  were  given.  In  re  Litchfield.  5 
Fed.  47,  Judge  Choate  followed  In  re  Slocum,  and  he  ex- 
pressly differed  from  In  re  Knight  in  holding  that  section 
5 12 1  applied  to  separate,  as  well  as  to  joint,  commissions. 
In  re  Blumer,  12  Fed.  489,  Judge  Butler  held  that,  where 
there  were  joint  assets  collected  which  might  have  been  di- 
vided, though  they  were  afterward  spent  in  the  vain  attempt 
to  realize  other  assets,  the  exception  did  not  apply.  Judge 
McKennan  concurred  in  the  opinion.  In  re  Byrne  (1868), 
I  N.  B.  R.  464,  Fed.  Cas.  No.  2,270,  Judge  McCandless 
affirmed  the  decision  of  a  register  which  held  that  the  excep- 
tion in  the  absence  of  joint  estate  was  not  applicable  under 
the  act  of  1867.  In  re  Johnson,  2  Low.  129,  Fed.  Cas.  No. 
7,369,  Judge  Lowell  intimated  in  his  opinion  that  the  excep- 
tion was  not  applicable,  but  that  point  was  not  involved  in 
the  decision.  See  In  re  McLean,  15  N.  B.  R.  333,  337,  Fed. 
Cas.  No.  8,879. 

The  act  of  1898  differs  materially  from  the  acts  of 
1841  and  1867.  *  *  *  Following  In  re  Knight,  it 
may  be  urged  that  the  provisions  of  section  5,  cl.  f, 
apply  only  where  a  joint  commission  has  been  taken 
out,  and  that  they  are,  therefore,  inapplicable  to  the 
case  at  bar.  But,  if  this  be  the  true  construction,  then, 
under  any  separate  commission,  whether  there  be  joint 
estate  or  not,  the  joint  creditor  will  be  allowed  to  take 
dividends  from  the  separate  estate  ratably  with  the  separate 
creditors.  If  this  be  the  law,  joint  creditors  will  commonlv 
take  out  separate  commissions,  as  was  pointed  out  by  Lord 
Loughborough  in  Ex  parte  Elton.  Lord  Thurlow's  rule, 
viz.  that  of  paying  all  creditors  ratably  under  a  separate  com- 
mission, did  not  prove  so  satisfactory  even  when  it  was  tem- 


712  AIARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

pered  by  the  equitable  remedies  which  he  administered,  that 
it  should  be  readopted  without  those  remedies.  I  hold,  there- 
fore, that  section  5,  cl.  f,  of  the  bankrupt  act  applies  the  rule 
of  distribution  to  separate  as  well  as  to  joint  commissions, 
either  directly  or  by  analogy.     See  In  re  Litchfield,  5  Fed. 

47- 

Considering  the  plain  language  of  the  bankrupt  act, 
which  recognizes  no  exceptions  to  the  general  rule,  the  his- 
tory of  the  exception  in  the  absence  of  joint  estate,  the  dis- 
credit and  misconception  which  that  exception  has  brought 
upon  the  general  rule  both  in  England  and  this  country,  the 
fantastic  subexceptions  imposed  upon  the  exception,  and  the 
language  used  by  the  Supreme  Court  in  MnrriJl  v.  Ncill,  I 
think  that  I  am  justified  in  holding  that  the  exception  is  in- 
applicable under  the  present  bankrupt  act.  If  the  language 
and  decisions  of  some  wise  and  learned  judges  are  thereby 
disregarded,  yet  it  has  been  shown  that  most,  if  not  all,  of 
those  judges  acted  under  a  misapprehension  of  the  history 
of  the  law.  It  is  further  to  be  noticed  that  section  5,  cl.  g. 
has,  by  permitting  the  joint  estate  to  prove  against  the  sepa- 
rate estate  and  vice  versa,  resolved  a  doubt  which  arose  un- 
der the  English  law,  and  has  enabled  a  Court  in  banruptcy 
to  secure  generally  the  equitable  distribution  of  the  property 
of  the  several  estates.  Section  5,  cl.  h,  provides  expressly 
for  the  settlement  of  the  partnership  affairs  where  one  part- 
ner has  been  adjudged  a  bankrupt  under  a  separate  commis- 
sion by  directing  the  remaining  partners  to  settle  the  part- 
nership business ;  that  is  to  say,  to  pay  the  joint  debts.  This 
provision  removes,  at  least  in  part,  the  difficulty  pointed  out 
by  Lord  Eldon  in  the  application  of  the  general  rule  to  a 
separate  commission.  The  decision  of  the  referee  is  re- 
versed, and  the  petitioning  creditor  is  not  to  receive  a  divi- 
dend until  the  separate  debts  have  been  paid  in  full.- 


^  Judge  Lowell's  construction  of  the  Bankrupt  Act  has  been  con- 
curred in  by  the  Circuit  Court  of  Appeals  of  the  Second  Circuit.  In  re 
Janes.  133  Fed.  912,  1904,  and  by  the  Circuit  Court  of  Appeals  of  the 
Fourth  Circuit,  Euclid  Nat.  Bk.  v.  Union  Trust  and  Deposit  Co.,  149 
Fed.  975.  1906,  but  see  the  action  of  the  Circuit  Court  of  Appeals  for 


J 


IN  RE  WILCOX  713 

the  Third  Circuit,  in  Conradcr  v.  Cohen,  121  Fed.  801,  1903,  where 
Judge  Acheson,  speaking  for  the  Court,  said :  "That  where  there  are 
no  partnership  assets  and  no  solvent  partner,  the  firm  creditors  share 
in  the  separate  estate  of  the  bankrupt  partner  pari  passu  with  the  indi- 
vidual creditors,  was  the  recognized  rule  under  the  Bankrupt  Act  of 
1807  (14  Stat.  517);  In  re  Downing,  7  Fed.  Cas.  No.  4,044;  In  re 
Knight,  14  Fed.  Cas.  No.  7,880;  In  re  Pease,  13  N.  B.  R.  168,  Fed.  Cas. 
No.  lO.'SSi.  Here  we  cannot  do  better  than  quote  what  was  saM  by 
Circuit  Judge  Dillon  in  Re  Downing,  supra: 

"  'Section  36  of  the  Bankruptcy  Act  only  comes  into  operation  when 
there  are  firm  assets,  and  the  proceedings  are  instituted  against  the 
firm  and  each  of  its  members,  in  which  case  the  assets  are  to  be  mar- 
shaled according  to  the  equity  rule ;  firm  creditors  to  have  priority  as 
respects  the  joint  assets,  and  individual  creditors  as  respects  the  sep- 
arate assets  of  their  debtor.  This  construction  of  the  Bankruptcy  Act 
has  the  merit  of  producing  that  equality  which  it  is  the  leadin-^  and  mani- 
fest purpose  of  the  act  to  secure,  and,  in  effect,  reaches  the  result  which 
the  English  chancellors  have  felt  bound  by  equitable  principles  to  adopt, 
viz.,  that  where  there  is  no  joint  estate  and  no  solvent  partner,  all  the 
creditors,  joint  and  separate,  shall  share  pari  passu  in  the  estate  of  the 
bankrupt  partner.' 

"We  discover  no  material  difference  between  the  provisions  of  the 
Bankruptcy  Act  of  1867  and  those  of  the  act  of  1898  touching  the 
question  under  consideration.  In  this  regard,  section  36,  of  the  former 
act  (14  Stat.  534)  and  subdivisions  'd,'  'f,  and  'g'  of  section  5  of  the 
latter  act  (30  Stat.  547,  548  [U.  S.  Comp.  St.  1901,  p.  3424]),  are  in 
substantial  agreement."  The  opinion  does  not  refer  to  the  case  of 
in  re  Wilcox. 

Collier,  in  his  work  on  Bankruptcy  (edition  of  1909),  p.  132,  says: 
"It  is  to  be  hoped  that  it  [Judge  Lowell's  opinion]  has  sounded  the 
knell  of  all  exceptions  to  the  broad  rule  that  joint  creditors  share  in 
joint  assets  and  individual  creditors  in  individual  assets." 


714  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 


Ex  Parte  PLUMMER. 

In  the  High  Court  of  Chancery,  Before  Lord  Cotten- 

HAM,   1841. 

I  Phillips  Reports,  56. 

This  was  an  appeal,  in  the  form  of  a  special  case,  from 
the  Court  of  Review. 

The  material  facts,  as  stated  in  the  case,  were,  that  pre- 
viously to  the  issuing  of  the  commission,  the  bankrupts  car- 
ried on  business  in  partnership  as  West  India  merchants,  in 
the  course  of  which  the  firm  became  indebted  to  George 
Joad,  in  the  sum  of  2000/.  for  monies  lent,  and  in  the  further 
sum  of  5998/  13^.  ^d  for  the  freight  of  ships  of  which  Joad 
was  the  owner.  Being  desirous  of  obtaining  further  ad- 
vances, they  assigned  to  Joad  certain  West  India  securities 
belonging  to  the  firm,  and  entered  into  joint  and  several 
covenants  for  the  payment  of  the  2000/.  and  any  further 
sum  or  sums  which  Joad  might  afterwards  advance  to  them ; 
and  about  the  same  time  they  gave  him  a  similar  security 
for  the  payment  of  the  5998/.  it^s.  /\d.,  and  any  further  sums 
in  which  the  firm  might  afterwards  become  indebted  to  him 
for  freight,  not  exceeding  10,000/.  The  amount  due  from 
the  firm  of  Joad,  at  the  time  of  the  bankruptcy,  on  the  first- 
mentioned  security  was  10,014/.  ys.  ^d.,  and  on  the  other 
security  10,742/.  4.?.  '^d.,  in  respect  of  which  two  debts  he 
tendered  a  proof  to  the  commissioners,  for  the  gross  sum  of 
20,014/.  ys.  ^d.,  against  each  of  the  separate  estates  of  the 
bankrupts.  The  commissioners,  however,  disallowed  the 
proof,  and  the  judges  of  the  Court  of  Review  having,  on 
two  occasions,  on  which  the  case  was  subsequently  brought 
before  them,  been  divided  in  opinion,  it  was  eventually 
arranged  that  an  order  should  be  made,  allowing  the  proof, 
without  prejudice  to  the  securities,  in  order  that  the  question 


EX  PARTE  PLUMMER  715 

might  be  submitted,  in  the  form  of  a  special  case,  to  the  Lord 
Chancellor.^ 

The  Lord  Chancellor  :  This  was  a  special  case  stated, 
under  the  act  of  parliament,  by  the  Court  of  Review,  for  the 
opinion  of  this  Court.  [His  Lordship  then  stated  the  facts, 
and  proceeded  as  follows.]  Upon  these  facts  the  question 
submitted  to  this  Court  is,  whether  George  Joad,  being  a 
separate  as  well  as  joint  creditor  of  the  bankrupts,  is  entitled 
to  prove  his  whole  debt  against  their  separate  estates;  or 
whether  he  is  entitled  to  prove  only  for  the  balance  which 
shall  remain  due  to  him  after  realising  the  security  which 
he  holds  upon  their  joint  estate. 

Now  what  are  the  principles  applicable  to  cases  of  this 
kind?  If  a  creditor  of  a  bankrupt  holds  a  security  on  part 
of  the  bankrupt's  estate,  he  is  not  entitled  to  prove  his  debt 
under  the  commission,  without  giving  up  or  realising  his  se- 
curity. For  the  principle  of  the  bankrupt  laws  is,  that  all 
creditors  are  to  be  put  on  an  aqual  footing,  and  therefore,  if 
a  creditor  chooses  to  prove  under  the  commission,  he  must 
sell  or  surrender  whatever  property  he  holds  belonging  to 
the  bankrupt;  but,  if  he  has  a  security  on  the  estate  of  a 
third  person,  that  principle  does  not  apply :  he  is  in  that  case 
entitled  to  prove  for  the  whole  amount  of  his  debt,  and  also 
to  realise  the  security,  provided  he  does  not  altogether  re- 
ceive more  than  20^.  in  the  pound. 

That  is  the  ground  on  which  the  principle  is  established ; 
it  is  unnecessary  to  cite  authorities  for  it,  as  it  is  too  clearly 
settled  to  be  disputed ;  but  I  may  mention  Ex  parte  Bennett 
[2  Atk.  527.]  Ex  parte  Parr  [i  Rose,  76.]  and  Ex  parte 
Goodman  [3  Mad.  373.],  in  which  it  has  been  laid  down. 

The  next  point  is  this :  In  administration  under  bank- 
ruptcy, the  joint  estate  and  separate  estate  are  considered 
as  distinct  estates :  and  accordingly  it  has  been  held,  that  a 
joint  creditor,  having  a  security  upon  the  separate  estate, 
is  entitled  to  prove  against  the  joint  estate  without  giving  up 
his  security ;  on  the  ground  that  it  is  a  different  estate.    That 

^  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


716  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

was  the  principle  upon  which  Ex  parte  Peacock  proceeded, 
and  that  case  was  decided  first  by  Sir  J.  Leach  and  after- 
wards by  Lord  Eldon,  and  has  since  been  foUowed  in  Ex 
parte  Bowden.  [i  Dea.  &  Ch.  135.]  Now  this  case  is  merely 
the  converse  of  that,  and  the  same  principle  applies  to  it. 
On  these  grounds  I  am  of  opinion  that  the  creditor  is 
entitled  to  prove  his  whole  debt,  without  giving  up  his 
security,  that  security  being  no  part  of  the  estate  under 
administration;  and  therefore,  that  the  order  of  the  Court 
below  was  right ;  but  as  the  point  is  one  upon  which  the 
Judges  of  that  Court  have  been  divided  in  opinion,  on  two 
occasions  on  which  it  has  been  brought  before  them,  I  think 
it  is  not  a  case  for  costs  on  either  side.^ 


'  The  Bankrupt  Act  of  1898  provides,  that  a  secured  creditor's  claim 
shall  be  allowed  for  the  purpose  of  receiving  a  dividend  "for  such 
sums  only  as  to  the  court  seems  to  be  owing  over  and  above  the  value 
of  their  securities."  (Section  57.)  A  secured  creditor  shall  include  a 
creditor  who  has  security  for  his  debt  upon  the  property  of  the  bankrupt 
of  a  nature  to  be  assignable  under  this  act,  or  who  owns  such  a  debt 
for  which  some  indorser,  surety,  or  other  persons  secondarily  liable  for 
the  bankrupt  has  such  security  upon  the  bankrupt's  assets."  (Section 
I  (23).) 


IN  THE  MATTER  OF  FARXUM  717 


In  The  Matter  of  FARNUM. 

In  the  District  Court  of  the  United  States^  for'the 
District  of  Massachusetts,  1843. 

6  Boston  Law  Reporter,  21.' 

Sprague,  J. :  Peter  Farnum  was  a  partner  in  five  different 
firms.  One  of  them  consisted  of  Peter  Farnum,  Luther 
Wright,  and  Claudius  B.  Long,  under  the  style  of  the  Black- 
stone  Woollen  Company.  All  the  members  of  that  firm 
have,  upon  their  own  applications,  been  declared  bankrupt. 
The  Blackstone  Bank  hold  a  bill  of  exchange,  drawn  by  the 
Blackstone  Woollen  Company  and  indorsed  by  Peter  Far- 
num, and  the  question  is,  whether  they  can  prove  their  debt 
both  against  the  joint  estate  of  the  firm,  and  the  separate 
estate  of  Farnum,  or  must  be  put  to  their  election.  There 
are  many  other  creditors  holding  similar  securities,  and  pre- 
senting the  same  question. 

The  English  rule,  it  is  admitted  on  all  hands,  excludes 
such  double  proof ;  and  although  it  is  not  binding  as  authority 
here,  yet,  in  a  question  concerning  the  rights  and  remedies 
on  commercial  paper,  the  rule  adopted  by  able  and 
enlightened  judicial  tribunals,  in  a  country  so  highly  commer- 
cial, would  be  adopted  as  a  safe  guide  unless  good  reasons 
be  presented  for  departing  from  it.  The  history  of  this  rule 
is  not  a  little  singular.  It  commences  with  Ex  Parte  Row- 
landson,  (3  Peere  Williams,  405),  before  Lord  Talbot,  in 
1735,  and  ends  with  E.v  Parte  Moult,  before  Lord  Brough- 
am, in  1832,  (Montague  and  Bligh's  Rep.  28).  The  first 
case  and  those  also  of  Ex  Parte  Parminter,  in  1 736,  Abing- 
ton  et  a!s.  in  1737,  and  Ex  Parte  Bond  and  Hill,  in  1743, 
(i  Atkins,  98),  and  Ex  Parte  Banks,  (I  Atkins,  106),  were 
all  cases  of  joint  and  several  bonds.     In  the  first  case,  Lord 


*The  Reporter's  statement  of  the  facts  of  the  case  is  omitted. 


718  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

Talbot  "at  first  inclined  to  think  that  the  petitioner  being 
a  joint  and  separate  creditor  ought  to  be  at  liberty  to  come 
single  satisfaction,  but  the  next  day  his  lordship  held  that  at 
law  when  A.  and  B.  are  bound  jointly  and  severally  to  J. 
S.,  if  J.  S.  sues  A.  and  B.  severally,  he  cannot  sue  them 
jointly,  and  on  the  contrary  if  he  sues  them  jointly  he  cannot 
sue  them  severally,  but  the  one  action  may  be  pleaded  in 
abatement  of  the  other,  so  by  the  same  reason  the  petitioner 
in  the  present  case  ought  to  be  put  to  his  election  under  which 
of  the  two  commissions  he  would  come."  And  on  page  408 
he  expressly  distinguishes  it  from  a  former  case  determined 
by  Lord  King  in  1732,  in  which  a  creditor  was  allowed  to 
prove  against  a  firm,  and  also  against  one  of  the  members 
on  his  separate  bond  for  the  same  debt,  and  again  relies  on 
the  rule  at  law  which  precludes  a  party  from  proceeding 
jointly  and  severally  on  the  same  bond  at  the  same  time. 

In  Ex  Parte  Moult,  George  Geddes  was  a  member 
of  two  firms,  one  of  which  was  the  drawer  and  the  other 
the  acceptors  of  a  bill  of  exchange;  and  the  creditor  claimed 
to  prove  against  both  estates.  It  was  decided,  that,  although 
double  remedies  would  exist  at  law,  they  shall  not  be  allowed 
in  bankruptcy;  and  this  is  in  accordance  with  many  preced- 
ing cases,  all  of  which  are  there  referred  to  and  examined. 
Ex  Parte  Moult  was  much  discussed,  and  a  strong  effort 
was  made  to  overthrow  the  rule.  It  first  came  before  the 
Court  of  Review  (Montague's  Cases  in  Bankruptcy,  321), 
and  the  four  judges  of  that  court  were  equally  divided,  two 
of  them  being  opposed  to  the  rule,  as  founded  neither  in 
law  nor  justice;  and  the  Lord  Chancellor  finally  decided 
solely  on  the  ground  that  the  rule,  although  arbitrary,  hav- 
ing been  acted  upon  for  a  length  of  time,  had  become  the 
law  of  the  court,  whatever  may  have  been  its  origin.  Here 
we  see,  that  the  decision  in  Ex  Parte  Rowlandson,  founded 
avowedly  on  the  course  of  proceedings  at  law,  which  pre- 
vents a  creditor  maintaining  a  joint  and  several  suit  at  the 
same  time  on  the  same  bond,  has  led  to  the  establishment 
of  an  arbitrary  rule,  confessedly  in  violation  of  law  when 


IN  THE  MATTER  OF  FARNUM  719 

applied  to  double  mercantile  securities.  It  is  not  necessary 
to  examine  all  the  cases,  and  see  by  what  steps  this  result 
has  been  reached — they  will  be  found  collected  in  Ex  Parte 
Moult. 

I  have  not  been  able  to  discover  any  sound  principle 
upon  which  this  result  rests.  Indeed,  it  has  been  generally 
admitted,  even  by  those  who  have  enforced  the  rule,  that  it 
is  as  little  consonant  with  justice  as  with  the  rules  of  law. 
Lord  Eldon,  in  Ex  Parte  Bevan  (lo  Ves.  Jr.  107),  says, 
"The  principle  seems  obvious;  yet  in  bankruptcy,  for  some 
reason  not  veiy  intelligible,  it  has  been  said  the  creditor  shall 
not  have  the  benefit  of  the  caution  he  has  used.  I  never 
could  see  why  a  creditor,  having  both  a  joint  and  several 
security,  should  not  go  against  both  estates."  Mr.  Eden,  in 
his  treatise  on  Bankruptcy,  ch.  11,  sec.  4,  says,  "This  doc- 
trine, by  refusing  a  creditor  the  benefit  of  the  caution  he  has 
used  in  obtaining  a  joint  and  several  security,  has  been  justly 
reprobated,  and  is  founded  upon  no  sound  principle  or 
analogy  whatever."  And  this  is  repeated  in  the  same  lan- 
guage in  the  last  edition  of  his  work,  published  in  1832,  un- 
der his  title  of  Lord  Henley,  p.  181.  Eminent  counsel,  who 
have  been  called  upon  to  sustain  the  rule,  have  shrunk  from 
defending  it  on  principle.  Mr.  Wigram,  in  Ex  Parte  Moult, 
(Montague's  Cases,  p.  333),  commences  his  argument  by 
saying,  "The  rule  is  established  by  decision,  and  as  the  court 
has  always  treated  it  as  a  rule  founded  on  convenience,  and 
not  upon  principle,  it  must  be  considered  as  an  arbitrary  rule 
which  this  court  is  bound  implicitly  to  follow."  The  Chief 
Judge  in  delivering  his  opinion  against  the  double  proof  in 
the  Court  of  Review,  in  Ex  Parte  Moult  (Montague's  Cases, 
,p.  334),  says,  "it  is  not  denied  that  the  case  urged  by  the  re- 
spondents (for  both  proofs),  is  most  in  accordance  with 
legal  doctrines  and  rights;  but  it  was  said  that  the  rule  es- 
tablished by  practice  in  bankruptcy  is  too  firmly  settled  to  be 
now  shaken."  And  he  does  not  attempt  to  defend  the  rule 
on  principle.  Sir  A.  Pell,  in  giving  his  opinion  in  the  same 
case,  p.  337,  says:  "Does  the  rule  correspond  with  the  law? 


720  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

It  is  admitted  it  does  not.  Is  it  consonant  with  jus- 
tice? It  is  almost  admitted  it  is  not.  We  are  therefore 
called  upon  to  give  our  assent  to  an  arbitrary  doctrine,  not 
founded  on  law  or  justice."  Again,  p.  340,  "I  cannot,  as  a 
common  lawyer,  understand  the  principle  of  this  arbitrary 
rule."  Sir  Edward  Sugden,  in  his  argument  before  the  Lord 
Chancellor,  in  Ex  Parte  Moult  (Montague  and  Bligh,  p. 
35 )",  attempts  to  give  the  reason  of  the  rule.  He  says,  "Orig- 
inally the  rule  might  have  seemed  strange,  because  at  law 
both  estates,  upon  a  joint  and  several  security,  might  have 
been  taken  on  execution.  Why  not  so  (it  might  have  been  ar- 
gued) in  bankruptcy?  The  reason  is,  that  the  fund  of  the 
debtor  is  no  longer  open  to  the  diligence  of  the  creditor.  All 
litigation  ceases,  and  the  assets  are  to  be  distributed  equitably 
among  the  creditors.  The  joint  fund  to  those  who  have 
looked  to  it  for  security  or  satisfaction,  and  the  separate  to 
the  creditors  who  have  trusted  the  individual  partner."  The 
fund  is  no  longer  open  to  the  diligence  of  the  creditor.  Be 
it  so.  But  this  creditor,  while  the  race  of  diligence  continued 
acquired  rights  to  come  on  the  joint  estate  by  one  contract, 
and  on  the  separate  estate  by  another,  both  of  them  valid, 
and  why  should  either  of  these  vested  rights  be  taken  away 
because  the  fund  is  not  now  open  to  future  diligence?  Fur- 
ther, it  is  said,  "The  joint  fund  is  to  be  distributed  to  those 
who  have  looked  to  it  for  security,  and  the  separate  to  the 
creditors  who  have  trusted  the  individual  partner." 

This  reason  has  also  been  strenuously  urged  at  the  bar 
in  the  present  case,  and  it  is  insisted  that  the  exclusion  of  the 
bank  from  both  funds  is  a  necessary  corollary  from  the  rule 
which  appropriates  the  joint  funds  primarily  to  joint  debts, 
and  the  separate  funds  to  separate  debts.  But  the  answer  is 
obvious.  This  creditor  looked  to  the  joint  fund  for  security 
and  satisfaction,  and  he  also  trusted  the  individual  partner. 
W^ithout  two  distinct  contracts,  giving  him  a  right  to  come 
upon  both  funds  he  would  never  have  parted  with  his  prop- 
erty. If  the  joint  fund  is  to  pay  joint  debts,  here  is  a  joint 
debt.    Can  you  exclude  A?    It  is  admitted  that  you  cannot. 


IN  THE  MATTER  OF  FARNUM  721 

You  must  allow  the  creditor  to  come  against  the  joint  estate, 
if  he  so  elects.  Neither  can  you  exclude  him  from  the  sepa- 
rate estate,  if  he  elect  against  that.  The  joint  creditors  can- 
not say,  you  shall  not  participate  with  us,  because  you  have 
a  separate  security;  nor  the  separate  creditors  exclude  him 
because  he  has  a  joint  security.  Then  certainly  neither  class 
is  wronged  by  his  participating  with  them,  and  how  are 
they  injured  by  his  participating  also  with  the  others?  The 
reason  is  unsatisfactory,  and  if  Sir  Edward  Sugden  could 
not  defend  it  on  principle,  we  may  well  conclude  that  it  is 
indefensible. 

I  think  it  apparent  that  Sir  Edward  Sugden  was  not 
himself  entirely  satisfied  with  the  reasons  for  the  rule,  for 
he  subsequently,  page  36,  says,  "It  is  argued  that  all  learned 
judges,  and  Sir  S.  Romilly  disapproved  of  the  rule  which 
compels  a  creditor,  having  a  joint  and  several  security,  to 
elect  upon  which  of  them  he  will  prove,  and  to  abandon  the 
other.  If,  notwithstanding  that  strong  expression  of  dis- 
approbation, the  rule  exists,  the  expression  of  disapproba- 
tion confirms  the  rule.  It  is  like  the  canon  of  descents, 
which  excludes  the  half  blood:  the  rule  is  disapproved,  but 
it  must  prevail  till  altered  by  legislation.  The  rule,  it  is 
true,  deprives  a  creditor  of  part  of  his  common  law  right,  if 
bankruptcy  happen."  It  is  urged  by  the  learned  counsel  for 
the  assignee,  in  the  present  case,  that  our  bankrupt  law  was 
made  with  reference  to  the  English  rule,  and  renders  it  ob- 
ligatory. Our  statute  departs  so  widely  from  the  English 
that  its  constitutionality  has  been  questioned  on  that  ground. 
It  established  a  system  in  most  respects  entirely  new,  and 
there  is  nothing  in  the  statute  to  indicate  that  it  was  intended 
to  render  English  decisions  obligatory  in  its  adminstraton. 
In  England  the  rule  excluding  proof  against  the  joint  and 
separate  estates  has  been  long  established.  Existing  con- 
tracts have  been  made  under  its  operation,  and  with  refer- 
ence to  it.  In  this  country  it  is  otherwise.  Existing  con- 
tracts have  been  made  under,  and  with  reference  to,  the  rule 
of  law  which  gives  to  a  party  holding  two  valid  obligations 


722  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

the  benefit  of  both.  This  right,  founded  both  in  law  and 
justice,  I  do  not  think  myself  bound  or  authorized  to  set 
aside  on  account  of  an  arbitrary  rule,  justly  reprobated  by 
the  most  eminent  judges  and  jurists  in  England,  and  never 
recognised  in  this  country. 

Where  a  dividend  has  been  paid  on  one  estate  the 
amount  thereof  would  be  deducted,  and  a  dividend  only, 
on  the  balance  allowed  from  the  other.  But  here  dividends 
on  both  estates  are  simultaneous,  and  the  creditor  is  entitled 
to  prove  against  both  for  the  whole.^ 


^  Compare:  Fayette  Nat.  Bk.  v.  Kenney,  79  Kty.  133,  1880.  (A  and  B 
were  partners.  They  gave  notes  to  a  certain  bank,  signing  the  same 
in  the  firm  name  and  adding  their  own  individvial  names.  The  firm  and 
the  partners  became  insolvent.  A  assigned  to  C  for  the  benefit  of  cred- 
itors, and  the  firm  also  assigned  to  C  for  the  same  purpose.  The  bank 
presented  its  claim  and  received  a  dividend  out  of  the  firm  assets.  C 
filed  a  petition  for  the  settlement  of  the  trust,  and  the  bank  presented 
its  claim  for  a  dividend  pro  rata  with  the  separate  creditors  of  A. 
Pryor,  J. :  "There  was  certainly  no  lien  created  on  the  individual 
estate  of  Kenney  by  his  signature  to  the  notes,  upon  which  distribution 
is  sought,  nor  is  it  questioned  that  the  parties  had  the  right  by  contract  to 
create  liens  that  the  chancellor  could  not  impair  or  disregard,  or  strengthen 
their  claims  by  having  the  name  of  a  stranger  to  the  firm  as  surety; 
but  it  is  maintained  that  although  Kenney  is  individually  liable,  because 
he  is  a  member  of  the  firm ;  still  there  is  a  legal  right,  or  an  equity, 
arising  in  favor  of  the  partnership  creditors  in  this  case  that  would  not 
have  existed  in  the  absence  of  Kenney's  individual  signature.  It  is 
conceded  that  a  several  and  joint  liability  exists  by  reason  of  the  firm 
signature,  and  that  Kenney's  individual  estate  could  be  subjected  to  the 
payment  of  the  several  debts,  as  well  as  his  interest  in  the  partnership; 
but  having  evinced  a  purpose  to  make  himself  individually  liable,  and 
appellants  having  accepted  the  notes  with  Kenney's  individual  signature 
to  them,  that  such  a  liability  might  be  created,  it  is  urged  that  he  must 
be  regarded  in  this  equitable  distribution  of  assets  as  both  a  partner- 
ship and  an  individual  debtor.  This,  we  think,  he  was  without  signing 
his  name  to  the  paper,  and  that  the  appellants  were  both  partnership 
and  individual  creditors ;  but  when,  at  their  own  instance,  they  were 
subrogated  to  the  rights  of  the  partners,  and  given  an  exclusive  lien 
on  the  assets  of  the  firm  for  the  payment  of  their  debts,  when  asking 
equity  they  will  be  required  to  do  equity") 


J 


IN  RE  McCOY  723 


In  Re  McCOY. 

In   the   Circuit   Court   of   Appeals   of   the   United 
States^  for  the  Seventh  Circuit^  1906. 

150  Federal  Reporter,  106. 

Grosscup^  Circuit  Judge,  delivered  the  opinion. 

The  firm  of  A.  McCoy  &  Co.,  was,  at  the  time  of  the 
adjudication  of  bankruptcy,  a  banking  copartnership  at 
Rensselaer,  Indiana — the  partners  being  Alfred  McCoy  and 
Thomas  McCoy,  likewise  bankrupts ;  both  the  firm  and  the 
individuals  having  been  adjudged  bankrupts  July  nth,  1904. 

The  appellant  was,  at  the  time  of  the  transaction  in 
question,  a  banker  in  New  York  City,  doing  business  under 
the  name  of  A.  T.  Bowen  &  Co.  August  20th,  1903,  there 
was  borrowed  from  appellant,  upon  ninety  days  time,  the 
sum  of  five  thousand  dollars,  and  on  November  6th,  1903, 
the  further  sum  of  five  thousand  dollars,  for  which  two 
promissory  notes  were  given,  signed  by  the  firm  of  A.  Mc- 
Coy &  Co.,  and  by  the  individual  names,  Alfred  McCoy, 
and  Thomas  McCoy;  the  proceeds  of  the  transaction  going 
into  the  copartnership  business.  Upon  the  firm  becoming 
bankrupt,  and  the  individual  partners  becoming  bankrupt 
also,  these  notes  were  presented  and  allowed  as  claims 
against  the  firm,  and  payments  thereon  have  been  made  to 
the  extent  of  thirty  per  cent.  The  claim  presented  against 
the  estate  of  Alfred  McCoy,  and  disallowed,  is  predicated 
on  these  notes  to  the  extent  that  they  remain  unpaid. 

In  addition  to  the  presumption  arising  on  the  face  of 
the  notes,  with  the  signatures  thereto,  the  record  shows 
that  at  the  time  the  money  was  borrowed  and  the  notes  exe- 
cuted, appellant  said  to  Alfred  McCoy,  who  negotiated  the 
loan,  that  he  (appellant)  "thought  some  collateral  ought  to 
be  put  up" ;  whereupon  McCoy  said  that  the  partners  "indi- 
vidually owned  four  thousand  acres  of  land,  and  that  they 
would  sign  the  notes  individually." 


724  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

At  common  law,  the  notes  under  the  circumstances  are 
not  only  the  obligation  of  the  firm,  but  also  of  the  indi- 
viduals ;  and  this  is  the  law  in  Indiana.  Winslow  v.  Wallace, 
ii6  Ind.  317,  17  N.  E.  923,  I  L.  R.  A.  179. 

"There  seems  to  be  no  dispute,"  says  Mitchell,  J.,  in 
Winslow  V.  Wallace,  supra,  "as  indeed  there  could  not  well 
be,  upon  the  proposition  that  a  creditor  who  holds  a  note 
of  which  a  firm  are  the  makers,  and  one  or  more  members 
thereof  endorsers,  has  in  his  hands  a  valid  joint  obligation 
against  the  firm,  and  at  the  same  time  a  distinct,  several 
and  separate  obligation  against  those  who  have  signed  as 
endorsers.  This  result  flows  from  the  fact  that  the  contract 
of  an  endorser  is  entirely  independent  of  and  distinct  from 
that  of  the  maker,  each  contract  being  in  itself,  when  the 
endorsement  is  in  regular  course,  conclusive  in  its  legal  im- 
port. The  creditor  holding  a  note  so  made  and  endorsed, 
may,  therefore,  pursue  his  remedy  against  the  partners  as 
makers,  and  he  may  also  proceed  against  those  individually 
liable  as  endorsers.  When  the  property  of  the  firm,  or  the 
individual  estates  of  the  members  bound  as  endorsers,  are 
being  judicially  administered,  the  creditor  is  entitled  to  par- 
ticipate with  the  partnership  creditors  in  the  joint  estate, 
and  he  may  at  the  same  time  avail  himself  of  any  appro- 
priate remedy  he  would  otherwise  have  against  the  endors- 
ers or  their  respective  estates.  He  may  receive  dividends 
from  the  joint  estate  as  a  partnership  creditor,  and  from  the 
separate  estate  of  the  partners  liable  on  their  contract  of 
endorsement  as  an  individual  creditor." 

In  re  Thomas  ct  al.,  8  Biss.  139,  Fed.  Cas.  No.  13,886, 
the  case  of  a  note  signed  by  the  partners  individually  for  a 
loan,  the  proceeds  of  which  went  to  the  copartnership — it  is 
said :  "There  is  a  class  of  cases  in  which  it  has  been  held  that 
where  a  creditor  holds  notes  signed  by  a  firm,  and  signed  or 
indorsed  also  by  an  individual  member  of  the  firm,  he  may 
prove  against  both  estates,  and  receive  dividends  from  both. 
In  re  Farnum,  Fed.  Cas.  No.  4,674 ;  Mead  v.  National  Bank 
of  FayetteviUe,  Fed.  Cas.  No.  9,366;  Emery  v.  Canal  Na- 


I 


IN  RE  McCOY  725 

tional  Bank,  Fed.  Cas.  No.  4,446.  These  cases  establish  a 
rule  opposed  to  the  old  rule  on  the  subject  in  England,  and 
the  principle  thus  settled  seems  to  reach  out  to  the  question 
involved  in  the  case  at  bar.  The  scope  of  these  decisions  is, 
that  when  an  individual  member  of  a  firm,  as  such,  becomes 
surety  upon  or  indorses  an  obligation  of  the  firm,  he  thereby 
gives  what  is  in  the  nature  of  security  upon  his  separate  es- 
tate to  the  firm  creditor;  and,  by  reason  of  the  individual 
liability  superadded  to  the  joint  obligation,  he  places  the  firm 
creditor  in  a  position  where  he  can  go  against  the  individual 
as  well  as  the  joint  estate.  Thus  it  results,  that  without 
the  indorsement  or  individual  signature  of  one  of  the  firm, 
the  firm  creditor  would  have  no  right  to  claim  against  the 
individual  assets  until  individual  creditors  had  been  first 
satisfied.  But  holding  the  individual  indorsement  or  signa- 
ture, the  firm  creditor  may,  in  the  first  instance,  prove 
against  the  separate  as  well  as  the  joint  estate.  Now,  such 
separate  liability  would  seem  to  be,  at  least,  in  the  nature 
of  security  though  differing  radically,  it  is  true,  in  character 
and  form  from  that  of  a  mortgage,  and  yet  double  proof, 
by  the  firm  creditor  in  such  case,  may  be  made  without  any 
abatement  of  advantage  which  his  diligence  has  secured." 

Indeed  these  principles  are  not  seriously  controverted 
— the  learned  district  judge  predicating  his  opinion  upon  a 
supposed  modification  of  this  rule  introduced  by  the  bank- 
ruptcy act.  That  modification,  if  there  be  any,  is  contained 
in  section  5,  subd.  "f,"  Act  July  i,  1898. 

This  provision  was  not  intended,  as  we  look  at  it,  to 
modify  in  any  respect,  the  pre-existing  lav\^.  The  section  is, 
indeed,  only  a  re-enactment  of  pre-existing  law.  The  claim 
disallowed,  was  not  a  claim  for  the  payment  of  a  partnership 
debt  out  of  the  individual  estate.  Had  it  been  the 
disallowance  would  have  been  proper;  for  both  under  the 
section  of  the  statute,  and  under  the  pre-existing  law,  any 
surplus  remaining  after  the  payment  of  individual  debts 
would  have  been  added  to  the  partnership  assets,  and  thereby 
have  become  available  to  the  payment  of  appellant's  debt.  The 


ne  MARSHALLING  ASSETS  LN  PARTNERSHIP  CASES 

claim  disallowed,  was  a  claim  for  McCoy's  individual  debt 
— as  much  so  as  if  McCoy  had  individually,  on  a  separate 
piece  of  paper,  obligated  himself  for  this  debt.  And  because 
it  is  his  individual  debt  it  is  provable  under  the  section 
cited,  as  well  as  under  the  general  law,  against  his  individual 
estate.  True,  the  proceeds  of  the  loan  having  gone 
into  the  partnership  estate,  it  may  be  that  individual  cred- 
itors could  insist,  that  in  the  marshaling  of  assets,  the  part- 
nership estate  should  be  exhausted  before  payment  is  made 
by  the  individual  estate.  That,  however,  is  a  question  we  do 
not  decide,  for  the  appellant  only  seeks  to  prove  his  claim 
against  the  individual  estate,  to  the  extent  that  it  is  unpaid 
by  the  partnership  estate. 

The  opinion  of  the  District  Court  rests  chiefly  upon  the 
case  of  Gaiiss  v.  Schrader  (C.  C.)  48  Fed.  816,  in  which 
two  men,  indebted  as  partners  on  two  promissory  notes  past 
due,  entered  into  a  written  contract  in  consideration  of  an 
extension  of  time,  to  convey  to  the  creditor  certain  property, 
not  a  part  of  the  partnership  assets,  as  additional  security. 
Upon  the  creditor  seeking  to  prove  his  claim,  arising  out 
of  this  executory  promise,  against  the  individual  estate  of 
one  of  the  partners,  the  court  well  said  that  the  character 
of  the  principal  indebtedness  was  not  thereby  changed — 
that  the  partnership  debt  was  not  thereby  made  an  individual 
debt. 

In  England  the  old  rule  was,  that  in  administering 
the  bankrupt  laws  of  that  country,  double  proof  against  the 
partnership  estate  and  the  individual  estate  of  the  partners 
was  not  allowed.  But  this  rule  has  not  been  followed  in 
this  country  {Emery  v.  Canal  National  Bank,  Fed.  Cas.  No. 
4,446;  Blimp's  Bankruptcy  [5th  Ed.]  p.  198;  In  re  Bradley, 
Fed.  Cas.  No.  1,772;  In  re  Farnum,  Fed.  Cas.  No.  4,6'/4; 
Mead  v.  National  Bank  of  La  Fayette,  6  Blatchf.  180,  Fed. 
Cas.  No.  9,366;  In  re  Bigelow,  3  Ben.  146,  Fed.  Cas.  No. 
1,397)  5  ^"d  there  is  nothing  in  the  bankruptcy  act  showing 
that  this  English  rule  was  intended  to  be  embodied  in  our 


IN  RE  McCOY  '  727 

act.    Indeed,  it  is  doubtful  if  the  old  rule  is  now  in  force  in 
England. 

The  order  appealed  from  must  be  reversed,  with  in- 
structions to  the  court  below  to  allow  the  claim  as  a  debt 
against  the  individual  estate  of  Alfred  McCoy,  to  be  paid 
therefrom  ratably  with  the  other  creditors  of  that  estate, 
to  the  extent  that  such  debt  is  not  paid  in  the  administration 
of  the  estate  of  the  firm  of  McCoy  &  Co.^ 


^  Judge  Anderson  in  the  Court  below  said :  "The  petitioner  contends 
that  by  reason  of  his  diligence  in  securing  the  individual  names  of  the 
partners  to  the  notes,  under  the  circumstances  testified  to  by  him,  he 
has  the  right  to  pursue  the  partnership  estate  and  the  individual  estates 
at  the  same  time ;  the  only  limitation  being  the  full  satisfaction  of  his 
debt.  Suppose  it  be  conceded  that  petitioner's  testimony  as  to  his  ex- 
tending credit  upon  the  faith  of  the  individual  property  and  the  circum- 
stances of  the  execution  of  the  notes  was  properly  admitted,  and  that 
it  be  given  full  effect,  then  the  case  stands  as  though  there  had  been 
written  into  the  notes  an  express  stipulation  that  'in  the  event  of  the 
bankruptcy  of  the  firm  and  the  members  composing  it,  the  payee  shall 
have  the  right  to  file  this  note  against  the  partnership  estate  and  the 
individual  estate  of  the  partners,  and  share  in  each  until  this  note  is 
fully  paid.'     In  effect  this  is  what  the  petitioner  claims. 

"The  bankrupt  law  impairs  the  obligation  of  the  debtor's  contracts 
and  discharges  him  from  all  of  them.  The  Bankrupt  Court  steps  in  and 
takes  possession  of  the  property  of  failing  debtors,  notifies  creditors 
to  establish  their  debts,  apportions  the  debtor's  property  among  his 
creditors,  and  gives  the  debtor  his  discharge.  In  case  of  a  partnership 
the  act  specifically  provides  how  the  partnership  and  individual  property 
shall  be  distributed.     *     *     * 

"If  petitioner  is  right  in  his  contention  here,  he,  being  one  creditor 
only,  can  make  an  agreement  with  his  debtor  that  in  the  event  of  bank- 
ruptcy another  rule  of  distribution  shall  be  effective.  It  may  be  con- 
ceded that  a  failing  debtor  may  make  a  contract  with  all  of  his  creditors 
to  distribute  the  debtor's  estate  in  a  different  way  from  that  provided 
in  the  bankrupt  law,  but  how  can  it  be  contended  that  one  creditor 
may  make  such  a  contract  with  the  debtor  to  the  prejudice  of  other 
creditors,  when  such  other  creditors  are  not  parties  to  the  contract  and 
know  nothing  about  it? 

"Petitioner  claims  that  his  notes  are  New  York  contracts,  and  that 
he  contracted  with  reference  to  that  law,  etc.  All  the  creditors  of  the 
firm  and  of  the  individuals  composing  the  firm  must  be  held  to  have 
contracted  with  a  view  to  the  bankrupt  law  and  of  its  provisions  relating 
to  the  distribution  of  the  debtor's  property  in  the  event  of  bankruptcy, 
and  surely  it  cannot  be  held  that  one  creditor,  even  bv  the  exercise  of 
'superior  diligence,'  can  make  a  contract  with  the  debtor,  the  effect  of 
which  is  to  change  the  rule  of  distribution  in  the  event  of  insolvency 
and  give  him  an  advantage  over  other  creditors  of  the  class  to  which 
he  claims  to  belong.  Yet  this  is  just  what  the  petitioner  asks.  His 
debt  is  a  partnership  debt.  He  has  so  declared,  and  he  has  filed  it 
against  the  partnership  estate  and  has  already  received  30  per  cent,  of 
it  from  that  estate.  One  thing  is  clear — he  is  a  partnership  creditor, 
and,  as  such,  under  the  plain  letter  of  the  law,  he  cannot  resort  to  the 
individual  estate  until  individual  creditors  are  first  paid,  so  reads  the 
law,  but  he   says  the  debtor  agreed   that  he   should  be  an   individual 


728  MARSHALLING  ASSETS  IN  PARTNERSHIP  CASES 

creditor  also,  and  as  such  should  have  the  right  to  resort,  notwith- 
standing it  will  prejudice  the  legal  rights  of  the  individual  creditors, 
and  notwithstanding  they  knew  nothing  of  and  never  assented  to  such 
an  agreement,  to  share  equally  with  individual  creditors  for  the  pay- 
ment of  this  debt.     To  state  such  a  proposition  is  to  answer  it. 

"As  between  themselves  the  debtor  and  petitioner  can  by  contract 
agree  that  a  debt  which  is  a  partnership  debt  shall  be  treated  as  an 
individual  debt,  but  surely  such  agreement  cannot  affect  the  rights  of 
other  individual  creditors  under  the  bankrupt  law." 


CHAPTER  XIII 


FRAUD  ON  CREDITORS. 
SECTION     I.— ON     PARTNERSHIP    CREDITORS 


Ex  Parte  RUFFIN. 

In  the  High  Court  of  Chancery,  Before  Lord  Eldon, 

1801. 

6  Vesey  Junior's  Reports,   119. 

In  June,  1797,  Thomas  Cooper  of  Epsom,  brewer,  took 
James  Cooper  into  partnership.  That  partnership  was  dis- 
soh'ed  by  articles,  dated  the  3d  of  November,  1798;  under 
which  the  buildings,  premises,  stock  in  trade,  debts,  and 
effects,  were  assigned  to  James  Cooper  by  Thomas  Cooper ; 
who  retired  from  the  trade.  Upon  the  2d  of  April,  1800. 
a  commission  of  bankruptcy  issued  against  James  Cooper; 
under  which  the  joint  creditors  attempted  to  prov^  their 
debts;  but  the  Commissioners  refused  to  permit  them;  upon 
which  a  petition  was  presented  to  Lord  Rosslyn ;  who 
made  an  order,  that  the  joint  creditors  should  be  at 
liberty  to  prove;  with  the  usual  directions  for  keeping  dis- 
tinct accounts,  and  an  application  of  the  joint  estate  to  the 
joint  debts,  and  of  the  separate  estate  to  the  separate  debts. 
At  a  meeting  for  the  purpose  of  declaring  a  dividend  the 
Commissioners  postponed  the  dividend,  in  order  to  give  an 
opportunity  of  applying  to  the  Lord  Chancellor;  in  conse- 
quence of  which  this  petition  was  presented;  praying  that 
the  partnership  effects  remaining  in  specie,  and  possessed  by 
the  assignees,  may  be  sold;  and  that  the  outstanding  debts 
may  be  accounted  joint  estate. 

By  the  articles  of  dissolution  the  parties  covenanted  to 
abide  by  a  valuation  to  be  made  of  the  partnership  property; 
and  James  Cooper  covenanted  to  pay  the  partnership  debts 

(729) 


730  FRAUD  ON  CREDITORS 

then  due,  and  to  indemnify  Thomas  Cooper  against  them; 
and  Thomas  Cooper  covenanted  not  to  carry  on  the  trade  of 
a  brewer  for  twenty  years  within  twenty  miles  of  Epsom.  A 
bond  for  £3,000,  the  calculated  value  of  the  partnership 
property  assigned,  was  given  to  Thomas  Cooper  by 
James  Cooper  and  his  father,  as  surety.  In  pursu- 
ance of  the  covenant  the  partnership  property,  consist- 
ing of  leases,  the  premises,  where  the  trade  had  been  car- 
ried on,  stock,  implements,  outstanding  debts,  and  other 
efYects,  were  valued  by  arbitrators  at  £2,030  after  charging 
all  the  partnership  debts  then  due.  James  Cooper  by  his 
affidavit  stated  that  all  the  joint  creditors  knew  of  the  dis- 
solution and  the  assignment  of  the  property;  that  adver- 
tisements were  published;  and  the  deponent  after  the 
dissolution  received  many  debts  due  to  the  partnership;  but 
paid  more  on  account  of  the  partnership.  His  father  by 
affidavit  stated,  that  he  paid  the  interest  of  the  bond  regu- 
larly; and  intended  to  pay  the  principal,  when  due. 

Mr.  Romilly  and  Mr.  Cullen  for  the  joint  creditors, 
and  Mr.  Bell  for  Thomas  Cooper. — If  one  partner  can  by 
assigning  all  his  interest  in  the  effects  prevent  the  joint  cred- 
itors from  going  against  those  effects,  fraud  must  be  the 
consequence.  The  partners  may  agree  to  divide  the  effects, 
and  carry  on  business  separately.  By  this  agreement  be- 
tween the  partners  the  whole  fund  of  the  joint  creditors  is 
taken  away.  Upon  the  principles,  upon  which  the  effects, 
joint  at  the  date  of  the  bankruptcy,  are  applied  to  the 
joint  debts,  effects,  joint  at  the  dissolution  of  the  partner- 
ship, and  remaining  the  same  in  specie  at  the  time  the  com- 
mission issues,  should  be  considered  joint  property.  The 
ground  is  that  credit  has  been  given  upon  the  faith  of  the 
joint  property;  and  it  is  a  fraud  upon  the  persons  giving 
that  credit  to  apply  that  fund  to  the  separate  creditors, 
trusting  only  to  the  individual  and  to  the  separate  effects; 
and  that  ground  applies  equally  to  this  case.  Until  the  part- 
nership accounts  are  taken,  there  is  no  separate  property  but 
in  the  surplus  after  paying  the  partnership  debts  {^Taylor  v. 


EX  PARTE  RUFFIN  731 

Fields,  ante,  vol.  iv.  396;  post,  xv.  559,  n.]  :  the  cred- 
itors standing  in  the  place  of  the  bankrupt.  The  joint  cred- 
itors, therefore,  have  a  mediate,  if  not  a  direct,  lien  upon 
the  whole  of  the  partnership  effects.  At  law,  the  partner- 
ship creditors  have  more  advantage  than  under  a  com- 
mission; taking  the  partnership  effects  exclusively,  and  the 
separate  effects  with  the  separate  creditors.  What  dif- 
ference arises  from  the  circumstance,  that  the  partnership 
did  not  exist  at  the  time  of  the  bankruptcy?  That  is  not 
sufficient  to  take  the  case  out  of  the  common  rule.  In  West 
V.  Skip  [i  Ves.  239,  456]  it  is  laid  down  that  upon  a 
dissolution  by  agreement  or  by  time  the  partner  out 
of  possession  is  not  divested  of  his  property  in  and 
lien  upon  the  partnership  effects.  The  same  right  re- 
mains to  an  account  of  the  partnership  effects;  in 
which  the  first  item  always  is  the  payment  of  the  partner- 
ship debts.  The  position,  that  partners  can  as  between  them- 
selves by  any  act  or  agreement  alter  the  partnership  stock, 
so  as  to  affect  the  rights  of  third  persons,  cannot  be  main- 
tained. Wliy  have  they  not  an  equal  right  in  the  same 
manner  to  discharge  their  persons  by  such  act  or  agree- 
ment; especially,  if  with  the  knowledge  of  the  joint  cred- 
itors; but  Heath  v.  Percival  [i  P.  Will.  682.]  shows  that 
circumstance  will  not  bind  them;  the  transaction  being  res 
inter  alias  acta.  That  an  actual  assignment  and  divesting 
partnership  property  out  of  one  partner  will  not  defeat  the 
right  against  the  partnership  effects,  is  proved  by  Ex  parte 
Biirnahy  [i  Cooke's  Bank.  Law,  253,  4th  edit.;  8th  edit,  by 
Mr.  Roots,  269].  No  evidence  is  produced  to  show  that 
the  separate  creditors  thought  this  was  separate  property; 
and  gave  credit  accordingly :  it  must  therefore  be  taken,  that 
the}^  knew,  it  was  not.  The  assignment  is  made  upon  con- 
dition and  subject  to  the  payment  of  the  partnership  debts. 
A  considerable  part  of  the  property  consisted  of  debts ;  which 
are  not  assignable.^ 

^  The  Reporter's  notes  of  the  argument  of  counsel  for  the  assignees 
are  omitted. 


732  FRAUD  ON  CREDITORS 

Lord  Chancellor:  This  case  is  admitted,  unless  Ex 
parte  Burnaby  applies  to  it,  to  be  new  in  its  circum- 
stances. Therefore,  if  I  was  of  opinion,  that  the  peti- 
tion could  be  supported,  I  should  be  very  luiwilling  to 
express  that  in  bankruptcy;  where  my  opinion  would  not 
be  subject  to  review.  If  the  case  I  have  mentioned  has 
decided  the  point,  there  is  the  authority  of  Lord  Hard- 
wicke  upon  it ;  which  would  weigh  down  the  most  considera- 
ble doubt,  that  I  could  be  disposed  to  entertain.  I  feel  great 
difficulty  in  complying  with  the  prayer  of  the  petition;  and, 
when  I  read  it,  was  struck  with  it,  as  a  new  case ;  and  as  one 
upon  which  I  do  not  clearly  see  my  way  to  the  relief  prayed. 
It  is  the  case  of  two  partners ;  who  owed  several  joint  debts ; 
and  had  joint  effects.  Under  these  circumstances  their  cred- 
itors, who  had  a  demand  upon  them  in  respect  of  those 
debts,  had  clearly  no  lien  whatsoever  upon  the  partnership 
effects.  They  had  power  of  suing,  and  by  process  creating 
a  demand,  that  would  directly  attach  upon  the  partnership 
effects.  But  they  had  no  lien  upon  or  interest  in  them 
in  point  of  law  or  equity.  If  any  creditor  had  brought  an 
action,  the  action  would  be  joint :  his  execution  might  be 
either  joint  or  several.  He  might  have  taken  in  execution 
both  joint  and  separate  effects.  It  is  also  true,  that  the  sep- 
arate creditors  of  each  by  bringing  actions  might  acquire 
a  certain  interest  even  in  the  partnership  effects;  taking 
them  in  execution  in  the  way,  in  which  separate  creditors 
can  affect  such  property.     But  there  was  no  lien  in  either. 

The  partnership  might  dissolve  in  various  ways :  first 
by  death ;  secondly,  by  the  act  of  the  parties ;  that  act 
extending  to  nothing  more  than  mere  dissolution;  without 
any  special  agreement  as  to  the  disposition  of  the  property, 
the  satisfaction  of  the  debts,  much  less  any  agreement  for 
an  assignment  from  either  of  the  partners  to  the  others. 
The  partnership  might  also  be  dissolved  by  the  bankruptcy 
of  one  or  of  both,  and  by  effluxion  of  time.  If  it  dissolved 
by  death,  referring  to  the  law  of  merchants  and  the  well- 
known  doctrine  of  this  Court,  the  death  being  the  act  of 


EX  PARTE  RUFFIN  733 

God,  the  legal  title  in  some  respects,  in  all  the  equitable  title, 
would  remain  notwithstanding  the  survivorship;  and  the 
executor  would  have  a  right  to  insist  that  the  property  should 
be  applied  to  the  partnership  debts.  I  do  not  know,  that  the 
partnership  creditors  would  have  that  right,  supposing  bpth 
remained  solvent.  So,  upon  the  bankruptcy  of  one  of  them 
there  would  be  an  equity  to  say,  the  assignees  stand  in  the 
place  of  the  bankrupt;  and  can  take  no  more  than  he  could; 
and  consequently  nothing,  until  the  partnership  debts  are 
paid.  So,  upon  a  mere  dissolution,  without  a  special  agree- 
ment, or  a  dissolution  by  effluxion  of  time :  to  wind  up  the 
accounts  the  debts  must  be  paid ;  and  the  surplus  be  distrib- 
uted in  proportion  to  the  different  interests.  In  all  these 
ways  the  equity  is  not  that  of  the  joint  creditors,  but  that  of 
the  partners  with  regard  to  each  other,  that  operates  to  the 
payment  of  the  partnership  debts.  The  joint  creditors  must 
of  necessity  be  paid  in  order  to  the  administration  of  jus- 
tice to  the  partners  themselves.  When  the  bankruptcy  of 
both  takes  place,  it  puts  an  end  to  the  partnership  certainly : 
but  still  it  is  very  possible,  and  it  often  happens  in  fact,  that 
the  partners  may  have  different  interests  in  the  surplus ;  and 
out  of  that  a  necessity  arises,  that  the  partnership  debts  must 
be  paid :  otherwise  the  surplus  cannot  be  distributed  accord- 
ing to  equity,  and  no  distinction  has  been  made  with  ref- 
erence to  their  interests,  whether  in  different  proportions,  or 
equally.  Many  cases  have  occurred  upon  the  distribution 
between  the  separate  and  joint  estates;  and  the  principle  in 
all  of  them,  from  the  great  case  of  Mr.  Fordyce,  has  been, 
that  if  the  Court  should  say,  that  what  has  ever  been  joint 
or  separate  property  shall  always  remain  so,  the  conse- 
quence would  be  that  no  partnership  could  ever  arrange 
their  affairs.  Therefore  a  bona  fide  transmutation  of  the 
property  is  understood  to  be  the  act  of  men  acting  fairly, 
winding  up  the  concern;  and  binds  the  creditors;  and 
therefore  the  Court  always  let  the  arrangement  be,  as  they 
stand,  not  at  the  time  of  the  commission,  but  of  the  act  of 
1  bankruptcy. 


734  FRAUD  ON  CREDITORS 

Thomas  Cooper  is  admitted  to  be  solvent.  He  cer- 
tainly has  no  such  equity,  as  if  the  partnership  had  been 
dissolved  by  bankruptcy,  death,  effluxion  of  time,  or  any 
other  circumstance,  not  his  own  act.  But  he  dissolves  the 
partnership  a  year  and  a  half  go,  and,  instead  of  calling 
upon  these  effects  according  to  his  equity  at  the  dissolution 
to  pay  the  partnership  debts,  he  assigns  his  interest  to  the 
other,  to  deal  as  he  thinks  lit  with  the  property,  to  act  with 
the  world  respecting  it ;  desiring  only  a  bond  to  pay  a  given 
value  in  three  or  four  years.  Therefore  he  or  his  execu- 
tors could  not  sue.  If  it  was  necessary  for  the  creditors  to 
operate  their  relief  through  his  equity,  he  has  no  equity. 
It  is  then  said,  and  the  circumstance  had  struck  me,  that 
all  the  property  is  not  assignable  at  law :  for  instance  the 
debts :  but  as  between  the  two  Coopers  they  were  the  prop- 
erty of  the  bankrupt;  for  debts  are  within  the  statute  of 
King  James  [Stat.  21  Jam.  I.  c.  19,  s.  10,  11]  ;  and  if  left 
in  the  order  and  disposal  of  the  bankrupt,  he  is  proprietor 
of  the  debt.  Therefore  Thomas  Cooper  could  never  set  up  the 
insufficiency  of  the  legal  operation  of  the  assignment  against 
his  own  deed.  The  assignment  was  not  made  subject  to 
the  payment  of  the  debts,  but  in  consideration  of  a  cove- 
nant, leaving  no  duty  upon  the  property,  but  attaching  a 
personal  obligation  upon  the  assignee  to  pay  the  debts. 
The  creditors  therefore  cannot  rest  upon  the  equity  of  the 
partner  going  out.  I  was  struck  with  the  argument  of  in- 
convenience :  the  inconvenience  on  all  sides  is  great.  To 
say  this  seems  to  me  a  monstrous  proposition :  that,  which  at 
any  time  during  the  partnership  has  been  part  of  the  part- 
nership effects,  shall  in  all  future  time  remain  part  of  the 
partnership  effects;  notwithstanding  a  bona  fide  act.  Sup- 
pose, an  improbable  case,  that  the  partners  in  Child's  house 
chose  to  shift  their  shop  from  Temple  Bar  to  the  west  end 
of  the  town;  and  that  house,  now  the  property  of  the  part- 
nership, was  bona  fide  bought  by  one  of  the  partners;  and 
the  money  was  invested  in  the  purchase  of  the  new  house, 
in  which  they  were  going  to  reside :  suppose  a  still  more 


I 

11 


EX  PARTE  RUFFIN  735 

improbable  case,  that  a  year  and  a  half  or  ten  years  aft- 
erwards they  became  bankrupt :  would  that  house  be 
part  of  the  partnership  effects?  It  would  be  so,  if  it  re- 
mained without  the  legal  interest  being  passed,  or  without 
any  equitable  claim,  taking  it  out  of  the  reach  of  a  legal 
execution:  but  where  the  effect  is  a  bona  fide  transaction 
of  this  sort,  if  it  were  held  at  any  time  afterwards  to  be 
partnership  property,  not  for  the  purpose  of  satisfying  de- 
mands of  the  partners,  or  of  any  creditor,  who  cannot 
otherwise  be  satisfied,  but  to  enable  them  to  undo  all  the 
intermediate  equities,  commercial  transactions  could  not 
go  on  at  all.  It  would  be  much  less  inconvenience  to  ex- 
amine the  boiia  fides  of  each  transaction  than  to  say,  such 
transactions  shall  never  take  place. 

The  case  of  JVest  v.  Skip  falls  within  some  of  the  ob- 
servations I  have  made.  Heath  v.  Percival  does  not  apply 
at  all.  The  bond  in  that  case  was  not  given  up ;  and  there- 
fore the  creditor  keeping  the  best  security,  and  refusing  to 
part  with  it,  no  inference  can  be  made  against  the  conclu- 
sion arising  from  that.  Hankey  v.  Garratt  is  also  very  dif- 
ferent. There  the  partnership  was  dissolved  by  bankruptcy 
or  by  death  :  and  there  was  no  actual  transfer  of  the  property 
to  take  it  out  of  the  reach  of  legal  execution.  I  am  un- 
willing to  make  any  observation  upon  Burnahy's  Case.  I  do 
not  know  how  to  understand  it.  Whether  there  was  any- 
thing special  in  the  assignment,  I  cannot  find  out  from  the 
report.  I  shall  endeavor  to  find  the  papers.  It  looks  very 
like  this  case;  if  it  is  in  specie  this  case,  as  an  authority 
I  should  think  myself  bound  to  submit  to  it.  But  if  it  is 
not  in  specie  this  case,  there  is  so  much  doubt,  whether  this 
relief  can  be  given,  that  I  am  satisfied,  it  ought  to  be  given, 
if  at  all,  in  a  jurisdiction,  where  my  opinion  would  be  sub- 
ject to  review.  My  present  inclination  is  that  the  creditors 
have  not  this  equity.  I  have  considerable  doubt  also,  wheth- 
er, if  they  have  it,  Thomas  Cooper  would  be  benefited  by 
it;  and  a  farther  subject  of  grave  and  serious  doubt  is, 
whether,  if  the  joint  creditors  disturb  the  arrangement,  the 


IZd  FRAUD  ON  CREDITORS 

separate  creditors  would  not  have  a  right  to  set  the  ar- 
rangement right  at  his  expense. 

I  now  think,  there  is  a  circumstance  that  distinguishes 
Bwrnabys  Case.  The  assignment  was  not  by  one  to  the 
other  two,  but  by  one  to  one  of  the  other  two;  which  may 
be  very  different.  I  think,  that  circumstances  distinguishes 
the  case  so  much  that  I  shall  consult  the  interest  of  the 
parties  better  by  saying,  they  may  file  a  bill,  if  they  think 
proper,  than  by  farther  delay. 

The  Petition  was  dismissed.^ 


'^  Compare:  Ex  parte  Williams,  ii  Ves.  3,  1805  (Eldon,  J.:  "I  have 
frequently  since  I  decided  the  case  of  Ex  parte  Ruffin,  considered  it; 
and  I  approve  that  decision.  In  a  subsequent  case  the  dissolution  took 
place  only  a  week  before  the  question  arose;  and  the  true  question,  I 
thought,  was  upon  the  bona  fides  of  the  transaction,  whether  that, 
which  had  been  joint  estate,  has  become  separate  estate  *  *  *. 
Upon  the  facts  of  this  case  *  *  *  there  is  distinct  evidence  of 
an  agreement  [among  the  partners]  that  the  joint  etfects  shall  be  con- 
sidered separate  effects,  and  that  fact  calls  upon  me  to  declare  the 
conclusion  of  law,  that  there  are  separate  effects.") 

Holderness  v.  Shackels,  8  B.  &  C.  612,  1828  (A,  B,  et  al.,  were 
partners.  The  partnership  property  consisted  in  part  of  oil.  The  oil 
was  placed  in  barrels,  the  portion  to  be  allotted  to  each  partner  marked 
with  his  name,  and  deposited  in  a  warehouse.  The  warehouseman 
received  instructions  to  deliver  to  each  partner  on  demand  the  barrels 
marked  in  the  partner's  name,  unless  the  managing  partner,  B,  notified 
him  that  the  partner  was  indebted  to  the  partnership  for  his  share  of 
the  disbursements.  B  notified  the  warehouseman  that  A  was  indebted 
to  the  partnership.  A  became  a  bankrupt.  C,  A's  assignee,  brought 
an  action  of  trover  against  B.    Judgment  for  defendant). 


HOWE  V.  LAWRENCE  737 


HOWE  v.  LAWRENCE. 

In  the  Supreme  Judicial    Court    of    Massachusetts, 

1852. 

63  Massachusetts  Reports,  553. 
This  was  a  iD€tition  to  this  Court,  under  the  insolvent 
law  of  1838,  c.  163,  §18,  seeking  to  reverse  an  order  of  dis- 
tribution made  by  Myron  Lawrence,  Esq.,  a  commissioner 
of  insolvency,  in  the  county  of  Hampshire,  on  the  estate  of 
William  W.  Gardner,  an  insolvent  debtor.  The  case  was 
referred  to  a  master,  upon  whose  report  the  following  facts 
appeared : 

On  the  first  day  of  January,    1850,   Henry  D.   Shaw 
and  William  W.  Gardner  formed  a  copartnership  in  trade, 
in  Haydenville,    in  the   county   of   Hampshire,   under  the 
name  of  Shaw  and  Gardner.     On  the  twenty-fourth  day  of 
January,  185 1,  the  parties  being  mutually  dissatisfied,  said 
firm  was  dissolved,  and  Shaw  conveyed  all  his  interest  in  the 
partnership  property  to  Gardner,  he  agreeing  in  considera- 
tion therefor,  to  pay  all  their  joint  debts.     The  firm  and 
both  partners  were  at  that  time  insolvent,  although  there  was 
not  sufficient  evidence  to  warrant  the  belief  that  either  part- 
ner then  knew  it.  Immediately  after  the  dissolution,  Gardner 
informed  the  creditors  of  the  firm  that  he  should  continue 
the  business,   and   had   agreed  to   pay  all   the  partnership 
debts  of  Shaw  and  Gardner.     He  did  continue  the  business 
a  few  weeks,  and  in  that  time  added  to  the  stock,  to  an 
amount  of  five  or  six  hundred  dollars.    On  the  twenty-sev- 
enth day  of  February,  1851,  said  Gardner  filed  a  petition 
before  said  Myron  Lawrence,  Esq.,  for  the  benefit  of  the 
insolvent  laws  of  this  commonwealth,  and  his  whole  stock 
in  trade,  a  greater  portion  of  which  was  the  identical  prop- 
erty formerly  owned  by  Shaw  and  Gardner,  passed  into  the 
hands  of  Gardner's  assignees.     It  was  sold  by  them   for 
$1,670.39.     The  claims  against  the  former  firm  of  Shaw 


738  FRAUD  ON  CREDITORS 

and  Gardner,  proved  against  Gardner's  estate,  were  $5,050; 
and  his  private  debts  proved,  amounted  to  $850.  The  said 
Myron  Lawrence,  commissioner  of  insolvency,  ordered  that 
the  separate  creditors  of  said  Gardner  should  be  paid  in  full 
from  his  estate,  and  that  the  balance  remaining  should  be 
distributed  to  the  joint  creditors  of  the  firm  of  Shaw  and 
Gardner.  The  prayer  of  the  petition  in  this  case  was,  that 
all  that  portion  of  said  Gardner's  estate  which  had  formerly 
belonged  to  Shaw  and  Gardner,  might  be  distributed  to  the 
creditors  of  that  firm,  to  the  exclusion  of  the  separate  cred- 
itors of  Gardner,  or  that  his  entire  estate  might  be  distrib- 
uted, pari  passu,  to  the  joint  and  separate  creditors.  The 
petitioners  were  creditors  of  the  firm  of  Shaw  and  Gardner, 
and  had  proved  their  claim  against  Gardner's  estate.  The 
respondent  Lawrence,  admitted  the  facts  set  forth  in  the 
petition  and  submitted  himself  to  the  direction  of  the  Court. 
The  other  respondents  were  separate  creditors  of  said  Gard- 
ner, who  had  proved  their  claims  against  his  estate,  and  ob- 
jected to  the  prayer  of  the  petition.  The  said  Henry  D. 
Shaw  was  also  in  insolvency  in  the  county  of  Hampden,  and 
there  was  no  property  of  the  former  firm  of  Shaw  and 
Gardner  except  what  had  been  conveyed  to  said  Gardner  as 
before  stated.-^ 

BiGELow,  J. :  Upon  the  facts  reported  by  the  master  in 
this  case,  two  questions  arise. 

The  first  is,  whether  the  property,  which  belonged  to 
the  partnership  of  Shaw  and  Gardner,  and  which,  upon  the 
dissolution  of  the  partnership,  on  the  twenty-fourth  of  Jan- 
uary, 185 1,  was  sold  and  transferred  by  Shaw  to  Gardner, 
is  tO'  be  treated  as  the  separate  estate  of  Gardner,  and 
to  be  appropriated  as  such  to  the  payment  of  his  sepa- 
rate debts;  or  whether,  notwithstanding  the  sale  and  transfer 
by  one  partner  to  the  other,  it  is  still  to  be  regarded  as  joint 
estate,  and  to  be  applied  to  the  payment  of  the  debts  of  the 
partnership  accordingly. 

^  The    Reporter's    notes    of    the    argument    for    the    petitions    are 
omitted. 


HOWE  V.  LAWRENCE  739 

The  right  of  copartners  upon  dissolution  to  transfer 
the  joint  property  to  one  of  the  firm,  is  clear  and  unquestion- 
able.   The  effect  of  such  transfer  as  between  the  partners  is 
to  vest  the  legal  title  to  the  property  in  the  individual  partner, 
with  a  right  to  use  and  dispose  of  it  as  his  separate  estate. 
It  would  seem  to  follow  as  a  necessary  consequence,  that 
the  creditors  of  the  firm,  after  such  conveyance,  would  have 
no  right  to  look  to  the  property  transferred  as  joint  prop- 
erty, upon  which  they  had  any  special  claim  or  lien.     If  in 
such  transfer  there  is  no  fraud  and  collusion  between  the 
copartners  for  the  purpose  of  defeating  the  rights  of  the 
joint  creditors,  and  the  transaction  is  made  in  good  faith, 
upon  dissolution,  and  for  the  purpose  of  closing  the  affairs  of 
the  partnership,  the  joint  property  thereby  becomes  separate 
estate  with  all  the   rights  and   incidents  both   in  law   and 
equity,  which  properly  attach  thereto.    The  mere  fact  of  the 
transfer  of  the  property  does  not  in  any  way  affect  the 
rights  of  the  joint  creditors.     During  the  continuance  of  the 
partnership,  and  before  the  institution  of  proceedings  in  in- 
solvency, the  creditors  of  the  firm  have  no  specific  claim  or 
lien,  and,  strictly  speaking,  no  equity  as  against  the  effects 
of  the  partnership.     They  can  only  institute  actions  at  law 
for  their  debts  against  the  firm  on  which  they  can  take  the 
partnership  property,  or  the  separate  estate  of  such  partner, 
or  both,  for  the  purpose  of  satisfying  the  executions,  which 
they  may  obtain  upon  their  judgments  against  the  firm.    The 
joint  property,  after  its  transfer  to  one  of  the  copartners, 
is  equally  within  the  reach  of  legal  process  by  the  creditors 
of  the  firm  as  if  it  had  remained  the  property  of  the  part- 
nership.    Beyond  this  right  to  seize  the  joint  property  on 
legal  process,  the  creditors  of  the  firm,  before  proceedings  in 
insolvency,  have  no  control  over  the  partnership  effects,  and 
no  right,  either  in  law  or  equity,  to  restrain  the  disposition 
of  them.    The  partners  have  the  power  to  transfer  them  for 
a  valuable  consideration  to  each  other  or  to  strangers.     The 
only  limitation  upon  this  right  is,  that  it  shall  be  exercised 
bona  fide,  and  without  any  intent  to  defraud  the  creditors 


740  FRAUD  ON  CREDITORS 

of  the  firm  or  to  deprive  them  of  their  legal  or  equitable 
claims  upon  the  joint  estate  in  case  of  insolvency.  The  bona 
flcs  of  the  transaction  is,  therefore,  the  only  test  by  which 
to  determine  the  right  of  joint  creditors  to  have  property, 
which  has  been  transferred  upon  dissolution  to  an  individual 
member  of  the  firm,  applied  to  the  payment  of  the  joint 
debts.  If  the  transfer  has  been  made  honestly  and  for  a 
valuable  consideration,  the  property  has  thereby  become  sep- 
arate estate,  wholly  free  from  any  claims  of  the  joint  cred- 
itors. These  principles  are  fully  recognized  in  the  adjudged 
cases  both  in  this  country  and  in  England.  Collyer  on  Part. 
§§174,  894,  903;  Story  on  Part.  §358;  Ex  parte  Ruffin,  6 
Ves.  127 ;  Ex  parte  Fell,  10  Ves.  347 ;  Ex  parte  Williams,  1 1 
Ves.  T,;  Ex  parte  Rowlandson,  i  Rose,  416*  Campbell  v, 
Mullett,  2  Swan.  575;  Allen  v.  Center  Valley  Co.  21  Conn. 
130,  137;  Ferson  v.  Monroe,  i  Foster,  462,  469. 

These  cases  also  recognize  it  as  a  settled  rule  that  joint 
estate  is  not,  so  far  as  the  rights  of  creditors  are  concerned, 
that  which  was  such  at  the  time  of  the  dissolution,  but  that 
in  which  the  partners  are  jointly  interested  for  the  purposes 
of  the  partnership  and  the  settlement  of  its  concerns  at  the 
time  of  the  institution  of  proceedings  in  insolvency  by  a 
member  of  the  firm. 

The  application  of  these  principles  to  the  present  case 
is  decisive  against  the  right  of  the  joint  creditors  to  require 
the  property,  transferred  by  Shaw  to  Gardner,  to  be  appro- 
priated primarily  to  the  payment  of  the  debts  of  the  firm. 
Prima  facie  it  is  the  separate  estate  of  Gardner,  and  the  bur- 
den is  on  the  petitioning  creditors  to  show  that  it  was  con- 
veyed to  him  mala  fide  and  in  fraud  of  the  rights  of  creditors. 
There  is  nothing  in  the  facts  reported  by  the  master  from 
which  any  such  inference  can  be  fairly  made.  The  dissolu- 
tion took  place,  because  the  parties  were  mutually  dissatis- 
fied, and  the  retiring  partner  relinquished  his  right  to  the 
partnership  property,  in  consideration  of  an  agreement  by  his 
copartner  to  assume  and  pay  the  debts  of  the  firm.  It  is  not 
pretended  that  the  business  of  the  firm  has  resulted  in  any 


HOWE  V.  LAWRENCE  741 

surplus,  nor  that  the  agreement  to  pay  the  debts  was  not  a 
fair  and  full  consideration  for  the  transfer  of  the  retiring 
partner's  interest  in  the  partnership  property.  The  subse- 
quent conduct  of  Gardner  is  strongly  confirmatory  of  the 
good  faith  of  the  transaction.  He  continued  to  carry  on  the 
business,  formerly  conducted  by  the  firm,  and  notified  the 
creditors  by  letter  of  the  dissolution,  and  that  the  business 
would  be  continued  by  himself.  While  he  so  carried  on 
business  on  his  sole  account,  he  made  considerable  additions 
to  the  stock  on  his  own  credit,  amounting  to  five  or  six  hun- 
dred dollars.  Nor  is  there  any  positive  evidence  that  either 
of  the  copartners,  at  the  time  of  the  dissolution,  knew  or  be- 
lieved that  the  copartnership  would  not  be  able  to  pay  its 
debts  in  full,  although  in  fact  it  subsequently  turned  out  to 
have  been  at  the  time  insolvent.  Even  if  it  were  insolvent 
within  the  knowledge  of  the  partners,  at  the  time  of  the  dis- 
solution and  the  transfer  of  the  property,  it  is  by  no  means 
certain  that  the  transaction  would  then  be  fraudulent.  Coll- 
yer  on  Part.  §  902 ;  Ex  parte  Peakc,  i  Mad.  346.  But  it  is 
sufficient  for  the  present  case  that  there  is  no  proof  of  any 
such  knowledge  by  either  of  the  copartners. 

It  is  not  to  be  inferred,  however,  that  any  conveyance 
or  transfer  of  joint  property  to  a  copartner  made  with  a 
knowledge  of  the  insolvency  of  the  firm  and  with  an  intent 
to  deprive  the  creditors  of  its  proper  application  to  the 
payment  of  the  joint  debts,  would  defeat  the  right  of  the 
joint  creditors  in  proceedings  in  insolvency  to  follow  the 
partnership  effects  and  have  them  appropriated  to  the  pay- 
ment of  the  debts  of  the  firm.  Such  conveyance  would  be  in 
fraud  of  the  law,  and  equity  would  be  at  once  set  aside.  It  is 
only  where  partners  act  fairly  for  the  purpose  of  dissolution 
and  winding  up  the  affairs  of  the  firm,  that  creditors  will 
be  bound  by  a  change  of  the  partnership  property,  to  the 
separate  estate  of  one  of  the  copartners. 

It  was  urged  by  the  counsel  for  the  petitioners,  that,  as 
copartners  have  a  lien  upon  the  partnership  effects  for  the 
discharge  of  all  the  debts  of  the  firm,  even  after  a  dissolu- 


742  FRAUD  ON  CREDITORS 

tion,  this  lien  might  be  made  available  in  the  present  case 
for  the  benefit  of  the  joint  creditors;  and  that  in  this  way 
the  equities  of  the  creditors  might  be  worked  out  through 
the  medium  of  that  of  the  retiring  copartners.  It  is  un- 
doubtedly true,  in  the  absence  of  any  special  agreement  be- 
tween copartners,  as  to  the  application  of  the  partnership 
effects  after  dissolution,  that  a  retiring  partner  retains  a  lien 
upon  them  to  the  extent  of  enforcing  their  application  to 
the  payment  of  the  joint  debts,  and  that  creditors,  though 
they  have  no  lien  on  the  property  in  their  own  right,  are 
allowed  in  equity  to  assert  a  quasi  lien  by  administering  the 
equities  between  the  partners  themselves.  But  it  is  equally 
well  settled  that  a  retiring  partner  may  relinquish  this  lien, 
in  which  case  he  has  no  equity  through  which  the  creditors 
of  the  firm  can  work  out  their  own.  By  the  transfer  of  the 
joint  property  to  his  copartner,  and  taking  his  personal  con- 
tract and  security  for  the  payment  of  the  joint  debts,  he 
discharges  his  lien  and  substitutes  therefor  the  agreement 
of  his  copartner,  to  which  he  can  alone  look  for  his  rem- 
edy, in  case  he  is  called  on  to  pay  the  debts  of  the  firm. 
There  is  no  duty  left  on  the  property,  but  only  a  personal 
obligation  by  one  copartner  to  pay  the  joint  debts.  The 
creditors  in  such  case  cannot  rest  upon  the  equity  of  the 
outgoing  partner.  Collyer  on  Part.  §  894;  Story  on  Part. 
§  359 ;  Ex  parte  Ruffin,  iibi  sup.;  Ex  parte  Williams^  tibi  sup. 
The  transfer  in  the  present  case  falls  within  this  principle. 
Shaw,  the  retiring  partner,  relinquished  all  his  right  to  the 
property  of  the  firm,  in  consideration  of  a  promise  by  Gard- 
ner to  pay  all  the  debts  of  the  firm.  Shaw,  therefore,  has 
no  lien  which  can  be  enforced  for  the  benefit  of  the  joint 
creditors,  upon  the  partnership  effects.  The  property  was 
transferred  absolutely,  discharged  from  any  lien  or  trust, 
which  would  have  attached  to  it  in  the  absence  of  any  spe- 
cial agreement  between  the  partners  respecting  it. 

The  remaining  question  presented  by  the  petitioners  is. 
as  to  the  right  of  the  joint  creditors  of  the  firm  to  prove 
their  debts  against  the  separate  estate  of  Gardner,  and  take 


HOWE  V.  LAWRENCE  743 

dividends  thereon  pari  passu  with  the  separate  creditors.  This 
claim  is  founded  upon  the  recognized  exception  to  the  gen- 
eral rule  of  applying  joint  estate  to  the  payment  of  joint 
debts,  and  separate  estate  to  the  payment  of  separate  debts, 
which  has  been  established  by  the  English  courts  in  bank- 
ruptcy. That  exception  is,  when  there  is  no  joint  estate 
and  no  solvent  partner,  the  joint  creditors  are  allowed  to 
prove  and  share  equally  with  the  separate  creditors  in  the 
separate  estate.  It  is  a  sufficient  answer  to  this  claim  of  the 
petitioners,  that  the  statute  of  1838,  c.  163,  §  21,  recognizes 
no  such  exception  to  the  rule  therein  prescribed  for  the  dis- 
tribution of  the  assets  of  insolvent  debtors.  The  rule  is 
distinct  and  peremptory,  requiring  the  net  proceeds  of  the 
joint  stock  to  be  appropriated  to  pay  the  creditors  of  the 
firm,  and  the  net  proceeds  of  the  separate  estate  of  each 
partner  to  be  appropriated  to  the  payment  of  the  separate 
creditors.  This  provision  was  reported  by  the  learned  com- 
missioners who  drafted  the  insolvent  act,  and  enacted  by 
the  legislature  with  a  full  knowledge  of  the  exceptions 
which  had  been  engrafted  on  the  general  rule  of  distribu- 
tion by  the  course  of  judicial  decisions  in  England.  They 
designedly  omitted  them.  We  know  of  no  rule  of  construc- 
tion by  which  we  can  now  undertake  to  add  them  to  the 
statute.  The  rule  fixed  by  the  statute  may  sometimes  op- 
erate harshly,  as  all  general  rules  do,  but  it  is  definite,  clear, 
and  easily  applied.  The  exceptions  to  it  are  artificial  and 
refined,  leading  to  nice  and  subtle  distinctions,  and  some- 
times operating  with  great  inequality  and  injustice.  In- 
deed, it  has  been  said  by  high  authority,  that  the  character 
of  these  exceptions  has  rendered  the  foundation  of  the 
general  rule,  as  one  of  justice  and  equity,  open  to  criticism 
and  question,  and  difficult  to  be  sustained.  Story  on  Part. 
§§  379,  382.  Under  such  circumstances,  we  are  unwilling 
to  adopt  it  into  our  jurisprudence.  The  rule  fixed  by  the 
statute  must  be  adhered  to.  If  there  is  no  joint  estate  and 
no  surplus  of  the  separate  estate  after  paying  the  separate 


744  FRAUD  ON  CREDITORS 

debts,  the  creditors  of  the  partnership  can  receive  no  divi- 
dend. 

Such  being  the  legal  and  equitable  principles  applicable 
to  the  case  made  by  the  petitioners  before  the  commis- 
sioner of  insolvency,  it  is  clear  that  there  is  no  ground  for 
maintaining  the  petition. 

Petition  dismissed. - 


'  Comf>are:  In  re  Collier,  Fed.  Cas.  3,002,  1874  (The  members  of  the 
firm  of  Colher,  Taylor  &  Co.  transferred  to  Taylor  all  their  interest  in 
the  firm  property,  Taylor  undertaking  to  pay  the  firm  debts.  Taylor 
had  individual  debts  and  individual  property.  More  than  four  months 
after  the  assignment,  the  members  of  the  firm  were  adjudged  bank- 
rupt. The  question  arose  as  to  the  standing  of  the  firm  and  separate 
creditors  of  B  in  regard  to  the  assets  in  his  hands.  The  Register,  W. 
F.  Bowder,  said :  "It  is  now  an  elementary  principle  that  the  promise 
by  one  to  another  for  the  benefit  of  a  third  is  binding  and  enforceable 
by  and  in  the  name  of  the  third  party.  No  principle  is  more  deeply 
rooted  in  the  American  system  of  jurisprudence  than  this  familiar  rule. 
This  doctrine  is  tenable,  it  seems,  even  where  the  beneficiary  was  not 
cognizant  of  the  promise  when  made,  and  although  the  consideration 
did  not  move  from  him.  To  apply  this  rule  to  the  case  in  hearing  is 
perceptibly  easy.  Taylor,  in  consideration  of  certain  transfers  of 
property  to  him,  agreed  with  the  two  retiring  partners,  to  pay  all  the 
debts  owing  by  the  firm  of  Collier,  Taylor  &  Co.  By  this  promise  he 
is  bound,  and  the  joint  creditors  can  enforce  it  against  him  or  claim 
the  benefit  of  it,  either  before  or  after  the  bankruptcy  of  their  debtor. 
The  general  promise  of  Taylor  to  pay  all  outstanding  firm  liabilities  is 
as  much  a  contract,  and  is  to  be  treated  with  as  much  solemnity  as 
though  he  had,  in  writing,  indorsed  his  guaranty  on  the  back  of  every 
existing  obligation  of  the  copartnership.  In  a  case  similar  to  this,  In 
re  Dozvning  [Case  No.  4,045],  Judge  Dillon  uses  this  language,  in  ref- 
erence to  the  creditors  of  the  firm,  T  look  upon  their  rights  in  equity 
as  being  the  same  as  if  Downing  had  endorsed  the  pre-existing  firm 
paper,  in  which  case  they  could  have  proved  their  debts  against  either, 
if  not  both  the  firm  and  Downing.' 

"It  follows  from  the  foregoing  that,  in  our  judgment,  all  the  assets 
should  be  treated  as  the  separate  property  of  Taylor,  and  all  the  cred- 
itors should  share  pari  passu  in  the  dividends  arising  therefrom."  Bal- 
lard, District  J.,  concurred  in  the  opinion  of  the  Register). 


BAKER'S  APPEAL  745 


BAKER'S  APPEAL. 
In  the  Supreme  Court  of  Pennsylvania,  1853. 

21  Pennsylvania  Reports,  76/ 

Lewis,  J. :  These  are  appeals  from  the  decree  of  the 
Common  Pleas  of  Chester  County,  distributing  the  estate 
and  efifects  of  James  and  John  Yearsley,  lately  trading  under 
the  firm  of  James  Yearsley  &  Brother. 

On  the  I  St  April,  1847,  the  five  brothers,  James,  John, 
Nathan,  Thomas,  and  Benjamin  entered  into  partnership 
in  the  iron  business.  On  the  27th  July,  1848,  Thomas  and 
Benjamin  retired  from  the  firm,  disposing  of  their  interest 
in  the  partnership  estate  and  effects  to  the  other  three  broth- 
ers, the  latter  agreeing  to  pay  the  debts  of  the  firm,  and  to 
exonerate  and  for  ever  defend  the  said  Thomas  and  Benja- 
min from  all  obligation  to  pay  any  part  of  the  same. 

On  the  ist  April,  1849,  Nathan  Yearsley  sold  his  inter- 
est in  the  partnership  property  to  John  Yearsley.  It  is  stated 
that  this  sale  was  without  the  approbation  of  James  Yearsley. 
James  and  John  however  continued  the  business,  and  con- 
tracted debts  until  the  12th  December,  1850,  when  they 
executed  an  assignment  of  the  partnership  property  of  the 
said  James  Yearsley  and  John  Yearsley,  trading  and  doing 
business  under  the  firm  name  of  James  Yearsley  &  Brother. 
This  assignment  was  expressly  to  pay  the  creditors  of  the 
partnership  "composed  of  the  said  James  Yearsley  and  John 
Yearslc}'." 

There  are  three  classes  of  creditors  claiming  distribu- 
tion of  the  fund  in  the  hands  of  the  assignee,  i.  The  cred- 
itors of  the  first  firm,  consisting  of  the  five  brothers.  2. 
The  creditors  of  tlie  second  firm,  consisting  of  the  three 
brothers.  And,  lastly,  the  creditors  of  the  third  firm,  con- 
sisting of  the  two  brothers  who  made  the  assignment  ex- 
pressly for  the  benefit  of  their  own  partnership  creditors. 

*The  Reporter's  statement  of  the  facts  of  the  case  is  omitted. 


746  FRAUD  ON  CREDITORS 

The  appellants,  Davis  and  Baker,  are  creditors  of  the 
first  firm,  and  McGowan  was  originally  a  creditor  of  that 
firm,  but  now  claims  to  be  a  creditor  of  the  second  firm 
by  means  of  a  note  given  by  the  latter  upon  the  surrender 
of  his  claims  against  the  first  partnership.  McGowan  also 
claims  to  be  a  creditor  of  the  second  firm  for  a  sum  of 
money  loaned ;  but  as  this  claim  has  been  allowed  to  partici- 
pate in  the  distribution,  without  exemption,  its  right  will 
not  be  considered  here,  nor  its  position  disturbed. 

Where  the  interest  of  one  partner  in  the  partnership 
property  passes  to  another  person,  it  is  immaterial  whether 
that  transfer  be  efifected  by  a  sale  by  the  partner  himself 
for  a  valuble  consideration — by  a  sale  of  his  interests  on 
execution — by  his  death  and  the  succession  of  his  executor  or 
administrator,  or  by  assignment  under  the  bankrupt  or  the 
insolvent  laws.  "In  all  these  cases  the  party  coming  in  the 
right  of  the  partner,  comes  into-  nothing  more  than  an 
interest  in  the  partnership  which  cannot  be  tangible,  cannot 
be  made  available,  or  be  delivered,  but  under  an  account 
between  the  partnership  and  the  partner;  and  it  is  an  item 
in  the  account,  that  enough  must  be  left  for  the  partnership 
debts."  Taylor  v.  Fields,  4  Vesey  Jr.  396;  and  Deal  et  al  v. 
Bogue.     See  8  Harris  228. 

But  it  is  well  settled,  that  the  right  to  confine  such 
partner,  or  those  who  claim  title  under  him,  to  his  interest  in 
the  surplus,  after  payment  of  the  partnership  debts,  is  an 
equity  which  rests  in  the  other  partners  alone,  and  not  in  the 
creditors  of  the  firm.  The  latter  have  no  lien  on  the  prop- 
erty, and  must  work  out  their  preference  in  the  distribution 
of  the  partnership  funds,  entirely  through  the  medium  of 
the  partners  whose  interests  remain  undisposed  of:  Story's 
Equity,  §_  1253.  If  they  consent  or  submit  to  a  different  dis- 
position of  the  assets,  the  preference  of  the  creditors  is  at 
an  end,  and  they  must  rely  upon  the  personal  responsibility 
of  the  partners  who  contracted  the  debts.  Where  one  part- 
ner sells  his  interest  to  another,  in  consideration  of  an  en- 
gagement by  the  latter  to  pay  the  partnership  debts,  the  rule 


gm 


BAKER'S  APPEAL  747 

is  the  same.  The  engagement  to  pay  them  is  but  a  personal 
contract.  It  creates  no  lien  on  the  property.  It  follows  as 
a  necessary  consequence,  that  if  the  partner  who  has  acquired 
the  interests  of  his  former  associates,  and  in  whom  resides 
the  right  to  appropriate  the  partnership  assets  to  the  pay- 
ment of  partnership  liabilities,  thinks  proper  to  exercise  his 
dominion,  and  to  make  a  different  disposition  of  them,  he 
has  a  right  to  do  so;  and  the  preference  of  the  partnership 
creditors  engrafted  upon,  and  deriving  its  support  from  his 
equity,  ceases  to  exist.  The  scion  dies  with  the  stock.  These 
principles  are  announced  in  Story  on  Partnership,  sections 
358,  359;  Gow  on  Partn.  Ch.  5.  ^.  i ;  and  Collyer  on  Partn. 
b.  4,  ch.  2,  s.  I ;  and  appear  to  be  fully  sustained  by  Ex  parte 
Ruffin,  6  Vesey,  Jr.  126;  Taylor  v.  Fields,  4  Ves.  Jr.  396; 
Kelly's  Appeal,  4  Harris,  59;  n  Ves.  Jr.  3;  10  Ves.  Jr. 
347;  Doner  V.  Stauffcr,  i  Penn.  R.  198;  Campbell  v.  Mullet, 
2  Szvanst.  552,  and  other  authorities.  Lord  Eldon,  in  Ex 
parte  Rnffin,  seemed  to  think  that  if  the  right  to  dispose  of 
the  assets  did  not  exist  in  the  partners,  "no  partnership 
could  ever  arrange  its  affairs."  And  Chief  Justice  Gibson 
has  shown,  in  Doner  v.  Stauffer,  that  after  a  sale  of  the  in- 
terest of  one  partner,  the  equity  and  the  interest  of  the  re- 
maining partner  is  the  subject  of  sale  on  a  separate  execu- 
tion against  him,  which  passes  the  entire  interest  to  the  pur- 
chaser. And  that  where  the  interest  of  each  is  sold  on  sep- 
arate executions  for  their  individual  debts,  the  partnership 
creditors  can  neither  follow  the  property  in  the  hands  of 
the  sheriff's  vendee,  nor  claim  any  portion  of  the  proceeds 
of  sale.  There  can  be  no  stronger  illustration  than  this  of 
the  principle  that  the  partnership  creditors  have  no  equity 
of  their  own  upon  which  they  can  enforce  a  preference,  or 
control  the  partners  in  exercising  dominion  over  their  as- 
sets, so  long  as  they  remain  unencumbered  by  liens. 

If  the  property  from  which  the  fund  in  Court  arises  had 
been  assigned  for  the  benefit  of  the  creditors  of  the  second 
firm,  composed  of  the  three  brothers,  a  question  might  arise 
whether,  by  their  agreement  to  pay  the  debts  of  the  first 


748  FRAUD  ON  CREDITORS 

firm,  they  did  not  convert  those  debis  into  debts  of  the  sec- 
ond. But  it  is  not  necessary  to  discuss  that  Cjuestion,  inas- 
much as  the  assets  have  been  assigned  for  the  benefit  of  the 
creditors  of  the  last  firm,  composed  of  the  two  brothers. 
As  the  whole  right  of  property  existed  in  those  two  brothers, 
at  the  time  of  the  assignment,  their  right  to  appropriate  it 
to  the  payment  of  the  partnership  debts  of  the  firm  to  whom 
it  belonged  is  clear  and  unquestionable.  The  Act  of  1843 
does  not  stand  in  the  way  of  such  an  assignment.  That 
Act  was  not  intended  to  deprive  partners  of  their  legal  and 
equitable  right  to  appropriate  partnership  assets  to  the  pay- 
ment, without  preference,  of  all  the  debts  of  the  firm  to 
whom  the  property  belonged  at  the  time  of  the  assignment. 

The  right  of  property  existing  in  James  and  John 
Yearsley  at  the  time  of  assignment,  their  right  to  appropriate 
it  to  the  payment  of  the  debts  of  the  firm  of  which  they  were 
the  only  members  being  established,  and  the  fact  that  they 
have  so  appropriated  it  being  also  shown,  the  only  remain- 
ing question  is,  do  the  appellants  belong  to  that  class  of 
creditors?  This  is  the  pinch  of  the  case.  They  were  all 
originally  creditors  of  the  first  fi.rm.  McGowan  afterwards 
became  a  creditor  of  the  second.  But  neither  of  them  is  a 
creditor  of  the  third,  unless  he  has  become  so  without  his 
knowledge  or  consent,  by  the  sale  made  by  Nathan  Yearsley 
to  his  brother  John,  and  by  the  act  of  John  in  bringing  his 
interest  thus  purchased,  into  the  new  partnership,  composed 
of  himself  and  his  brother  James.  It  is  not  necessary  to  cite 
authorities  to  prove  that  it  takes  at  least  two  to  make  a  bar- 
gain. Nothing  can  be  clearer  than  that  these  transactions 
between  the  partners  created  no  contract  with  their  creditors. 
No  creditor  could  thereby  be  compelled  to  release  his  de- 
mand against  five  for  the  more  uncertain  security  of  a  claim 
against  two.  These  transfers  neither  discharged  the  original 
partners,  nor  imposed  upon  the  subsecjuent  firm  any  new  lia- 
bilities to  the  creditors  of  the  first.  And  they  furnish  no 
foundation  whatever  for  an  action  l)y  the  creditors  of  the 
two  first  firms  against  the  partnership  last  established.     A 


BAKER'S  APPEAL  749 

creditor  without  a  right  of  action  is  a  legal  impossibility.    If 
John,  when  he  purchased  the  interest  of  Nathan,  had  agreed 
with  the  latter  to  pay  the  debts  of  the  old  firm,  this  would 
not  have  made  them  his  creditors;  and  if  it  had,  they  would 
not  thereby  have  become  the  creditors  of  the  new  partnership 
about  to  be  established.     But  we  have  no  evidence  of  the 
terms  of  this  sale,  or  of  the  consideration  upon  which  John 
brought  his  interest  into  the  new  partnership  with  James, 
and  afterwards  united  with  him  in  applying  the  assets  to 
the  debts  of  that  firm.     The  effect  of  the  sale  by  Nathan  to 
John  was  to  dissolve  the  old  firm,  and  to  transfer  Nathan's 
interest  in  the  assets  to  John,  subject  to  the  right  of  James  to 
insist  on  applying  them  in  the  first  place  to  the  payment  of 
the  liabilities  of  the  old  firm.    This  right  he  might  insist  upon 
or  waive,  at  his  pleasure.    That  he  waived  it  is  demonstrated 
by  his  application  of  the  assets  to  other  purposes.     To  allow 
creditors  of  the  two  first  firms  to  claim  any  portion  of  this 
fund  would  invert  the  well  established  principle  that  the 
preference  of  partnership  creditors  is  not  founded  upon  any 
equity  of  their  own,  but  must  always  be  worked  out  through 
the  agency  of  the  partners ;  it  would  destroy,  without  author- 
ity of  law,  the  necessary  dominion  which  every  man  has  over 
his  own  property,  and  give  the  control  to  those  who  have 
fairly  transferred  all  their  rights  to  others.     To  class  these 
claimants  as  creditors  of  the  last  firm,  without  their  consent, 
without  the  consent  of  the  last  firm,  without  any  release  of 
their  claims  against  their  original  debtors,  and  without  any 
contract  or  consideration  whatever,  would  be  to  create  a 
liability  where  none  existed  either  by  the  contracts  of  the 
parties,  or  by  the  law  of  the  land.     To  permit  this  would  be 
an  illegal  interference  with  the  rights  of  the  creditors  of 
the  last  firm,  and  a  palpable  violation  of  the  terms  of  the 
assignment. 

The  errors  assigned  have  not  been  sustained,  and  the 
decree  of  distribution  is  therefore  to  be  aflirmed. 
LowRiE^  J.^  dissented. 


750  FRAUD  ON  CREDITORS 


BULLITT    V.    THE    CHARTERED    FUND  OF  THE 

METHODIST  EPISCOPAL  CHURCH. 

In  the  Supreme  Court  of  Pennsylvania^  1856. 

26  Pennsylvania  Reports,  108/ 

Black^  J. :  James  J.  Boswell  was  in  partnership  with 
Munson  H.  Treadwell.  The  firm  was  dissolved  in  1850. 
Treadwell  transferring  to  Boswell  all  his  interest  In  the 
partnership  effects,  and  Boswell  agreeing  to  pay  all  the  debts. 
In  1 85 1  Boswell  formed  a  limited  partnership  with  two 
other  persons,  he  being  the  general  partner.  On  the  29th  of 
January,  1853,  he  assigned  to  the  "Chartered  Fund"  certain 
claims  against  debtors  of  the  firm  composed  of  himself  and 
Treadwell,  which  was  then  in  the  hands  of  the  defendants 
for  collection.  The  object  of  this  assignment  was  to  pay  the 
"Chartered  Fund"  a  debt  due  from  himself  to  it.  On  the 
same  day  he  assigned  to  the  defendants,  for  the  benefit 
of  creditors,  all  the  property  of  the  limited  partnership; 
and,  to  one  of  the  defendants,  all  the  other  property  he  had. 
This  suit  is  brought  by  the  "Chartered  Fund"  to  recover  the 
money  collected  by  the  defendants  on  the  claims  assigned  by 
Boswell  to  it. 

The  first  objection  made  against  the  right  of  the  plain- 
tiff to  recover  is  the  form  of  the  action.  The  defendants 
insist  that  the  suit  should  have  been  brought  in  the  name  of 
Boswell  &  Co.,  for  the  use  of  the  "Chartered  Fund,"  and 
not  by  the  "Chartered  Fund,"  as  the  legal  plaintiff.  The 
action  is  right  enough.  It  is  not  brought  on  the  original  in- 
debtedness to  Boswell  &  Co.,  but  on  the  implied  undertaking 
of  the  defendants  that  they  would  pay  the  money  which 
they  collected  to  the  party  it  belonged  to.  That  party  was 
the  "Chartered  Fund,"  if  its  assignment  of  the  debts  was 
valid. 

It  is  argued  that,  these  claims  being  part  of  the  assets 


*The  Reporter's  statement  of  the  facts  of  the  case,  and  his  notes 
of  the  arguments  of  counsel  are  omitted. 


JK'  1 


BULLITT  V.  METHODIST  EPISCOPAL  CHURCH      751 

of  Boswell  &  Co.,  Boswell  had  no  power  to  assign  them  in 
payment  of  a  debt  due  from  himself.  It  is  a  sufficient  answer 
to  this,  that  the  partnership  between  Boswell  and  Treadwell 
had  been  dissolved  long  before  the  assignment.  The  outgo- 
ing partner  had  a  right  to  demand  that  Boswell  should  pay 
the  debts  of  the  firm,  for  such  was  the  contract;  but  a  stiit 
on  the  contract  was  his  only  means  of  enforcing  that  obli- 
gation. The  creditors  of  Boswell  &  Co.  had  a  right  to  de- 
mand that  the  assets  of  the  firm,  as  well  as  the  separate 
property  of  the  remaining  partner,  should  go  to  the  satis- 
faction of  their  just  claims,  but  they  had  no  specific  lien  on 
either  which  would  enable  them  to  follow  it  into  the  hands  of 
a  bona  fide  purchaser.  When  one  of  two  partners  retires 
from  the  business,  relinquishing  to  the  other  all  his  interest 
in  the  partnership  property,  the  remaining  partner  has  the 
same  dominion  over  it  as  if  it  had  always  been  his  own  sep- 
arate property. 

But,  at  the  time  Boswell  made  this  assignment  to  the 
plaintiff  to  pay  a  private  debt  of  his  own,  there  existed  a 
limited  partnership  between  him  and  two  other  persons,  he 
being  the  general  partner,  and  carrying  on  the  business.  It  is 
admitted  that  this  partnership  was  insolvent.  By  the  21st 
sect,  of  the  Limited  Partnership  Law,  every  assignment  by 
the  general  partner  of  his  own  property,  if  made  when  the 
partnership  is  insolvent,  is  void  as  against  the  creditors  of  the 
partnership.  The  defendants  are  assignees  for  the  benefit  of 
the  partnership  creditors,  and  in  the  name  of  those  creditors 
they  claim  the  right  to  set  aside  the  previous  assignment 
to  the  plaintiff  as  void  under  the  section  just  cited.  But 
does  a  voluntary  assignment  like  this  put  the  assignees  in 
the  place,  and  arm  them  with  the  power  of  creditors?  The 
cases  of  Tzvelvcs  v.  IVUlimns  (3  Wharton  485),  and  of  Van- 
dyke V.  Christ  (7  W.  &  Ser.  373),  decide  the  question  in  the 
negative.  Voluntary  assignees  represent  only  the  debtor 
himself ;  and  as  to  him,  his  own  assignment  of  the  claims  to 
the  plaintiff  was  valid  and  binding. 

Judgment  affirmed. 


752  FRAUD  ON  CREDITORS 


FRANKLIN  SUGAR  CO.  v.  HENDERSON. 
In  the  Court  of  Appeals  of  Maryland^  1897. 

86  Maryland  Reports,  452.' 

McSherry^  C.  J. :  These  four  cases  come  up  from  a 
pro  forma  order  quashing  attachments  sued  out  by  the  ap- 
pellants against  the  appellees,  Henderson,  Pfeil  and  Com- 
pany. In  November,  eighteen  hundred  and  ninety-two,  John 
B.  Henderson,  George  Henry  Pfeil  and  Alexander  J.  Mc- 
Donald formed  a  copartership  which  carried  on  business  in 
Baltimore  City  until  October  the  fourth,  eighteen  hundred 
and  ninety-five.  On  that  day  the  copartnership  was  dis- 
solved. It  was  indebted  at  the  time  to  sundry  persons, 
but  whether  it  was  insolvent  or  not  is  one  of  the  contro- 
verted issues  of  fact  that  will  be  considered  later  on.  Hen- 
derson sold  his  interest  in  the  concern  to  his  associates,  and 
assigned  and  made  over  to  them  all  of  his  right  and  title, 
as  a  member  of  the  firm,  in  and  to  the  property  and  assets 
of  every  kind,  real,  personal  and  mixed,  owned  by  the  co- 
partnership. Notice  of  dissolution  was  given  and  Pfeil  and 
McDonald  at  once  formed  a  new  firm  under  the  old  name. 
Just  ten  days  afterwards — that  is,  on  the  fourteenth  day  of 
October,  eighteen  hundred  and  ninety-five — Pfeil  and  Mc- 
Donald executed  a  deed  of  trust  to  Oscar  Wolff,  Esq.  The 
deed  was  made  by  "George  H.  Pfeil  and  Alexander  J.  Mc- 
Donald, trading  as  Henderson,  Pfeil  and  Company,"  and  is 
not  signed  by  Henderson.  It  recites  that  "the  parties  of  the 
first  part,"  that  is  Pfeil  and  McDonald,  "are  indebted  to 
divers  persons  and  firms  in  various  sums  of  money,  and  have 
become  and  are  unable  to  pay  such  indebtedness  in  full ;"  and 
that,  "in  order  to  have  their  assets  and  effects  collected  and 
faithfully  applied  to  the  payment  of  their  said  debts"  (that 
is,  the  debts  due  by  the  grantors)  the  assignment  was  made. 


The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


FRANKLIN  SUGAR  CO.  v.  HENDERSON  753 

After  making  provision  for  the  payment  of  costs  and  com- 
missions and  such  preferences  as  the  law  creates,  the  deed 
proceeds  to  declare  that  the  trustee  shall  apply  the  "proceeds 
of  the  joint  stock  of  the  said  copartnership" — that  is,  the  co- 
partnership of  which  Henderson  was  not  a  member — to  pay 
the  creditors  of  the  copartnership,  that  is,  the  copartnership 
composed  of  Pfeil  and  McDonald,  "and  to  appropriate  the 
net  proceeds  of  the  separate  estate  of  each  partner  to  pay  his 
separate  creditors,"  and  the  surplus  of  each  partner's  separate 
estate  after  the  payment  of  his  individual  creditors,  is  di- 
rected to  be  added  to  the  social  assets,  and  the  surplus,  if  any, 
of  the  partnership  assets  is  directed  to  be  divided  between 
the  partners  in  the  proportions  of  their  respective  interests, 
and  to  be  applied  to  the  payment  of  their  separate  debts.  It 
is  important  to  observe  that  the  deed  of  assignment  makes 
no  reference  whatever  to  the  old  firm  of  which  Henderson 
had  been  a  member,  and  contains  no  provision,  in  terms  or  by 
implication,  for  the  payment  of  the  creditors  of  that  firm  out 
of  the  assets  owned  by  it  on  October  the  fourth,  the  day  of 
its  dissolution. 

On  October  the  fifteenth — the  day  following  the  execu- 
tion and  recording  of  the  deed  of  trust — the  appellants,  who 
are  creditors  of  the  old  firm  of  Henderson,  Pfeil  and  Com- 
pany, sued  out  of  the  Superior  Court  of  Baltimore  City, 
attachments  which  they  caused  to  be  laid  in  the  hands  of 
Mr.  Wolff  as  garnishee.  They  allege,  as  one  of  the  grounds 
upon  which  the  attachments  are  founded,  that  Henderson, 
Pfeil  and  ]\IcDonald  have  assigned,  disposed  of  or  concealed 
or  are  about  to  assign,  dispose  of  or  conceal  their  property  or 
some  part  thereof  with  intent  to  defraud  their  creditors.  The 
garnishee  appeared,  pleaded  nulla  bona  and  filed  a  motion 
to  quash,  founded  on  the  claim  that  the  property  and  assets 
attached  were  the  property  and  assets  of  Mr.  Wolff,  the 
trustee,  and  not  of  the  defendants.  The  motion  was  heard 
and  the  learned  Judge  at  Large  was  of  opinion  that  the  mo- 
tion to  quash  ought  to  be  overruled ;  but  by  an  agreement 
made  between  the  parties  a  pro  forma  order  was  signed  over- 


754  FRAUD  ON  CREDITORS 

ruling  the  motion  and  finally  quashing  the  attachments. 
From  this  pro  forma  order  the  pending  appeals  were  taken. 

A  reversal  is  claimed  upon  two  grounds,  and  these  are : 
First,  that  the  deed  of  trust  to  Mr.  Wolff  is  fraudulent  in 
law  as  hindering  and  delaying  the  creditors  of  the  old  firm ; 
and,  secondly,  that  the  deed  is  fraudulent  in  fact. 

We  may  as  well  dispose  of  the  second  ground  first,  be- 
cause but  little  need  be  said  respecting  it.  The  record  has 
been  minutely  read  and  carefully  considered,  and  we  all  agree 
that  it  furnishes  not  the  slightest  warrant  for  impeaching 
the  deed  on  account  of  actual  fraud.  The  conduct  of  Mr. 
Wolff  throughout  is  free  from  the  faintest  shade  of  bad 
faith.  There  is  nothing  to  suggest  even  a  suspicion  that  he 
was  not  actuated  by  the  very  highest  and  most  honorable 
motives  and  intentions;  and  there  is  no  evidence  whatever 
that  can  be  tortured  into  an  imputation  of  bad  faith.  We 
are  thoroughly  convinced  that  the  trustee  acted  in  the  ut- 
most good  faith ;  and  we  accordingly  dismiss  this  branch  of 
the  case  without  further  comment,  and  turn,  at  once,  to  the 
consideration  of  the  other. 

Partnership  creditors  have  no  lien  on  partnership  assets, 
but  the  partners  themselves  have  a  right  to  insist  upon  the 
appropriation  of  the  joint  property  to  the  payment  of  joint 
debts,  upon  the  principle  that  as  the  joint  debts  were  con- 
tracted in  making  the  purchases  of  the  joint  assets  the  latter 
ought  primarily  to  be  charged  with  the  burden  of  paying  the 
former.  The  right  of  the  partners  to  have  the  joint  debts 
paid  out  of  the  joint  assets  in  preference  to  the  right  of  the 
separate  creditors  to  be  paid  out  of  the  same  assets,  gives  rise 
to  the  derivative  equity  of  the  joint  creditors  to  have  pay- 
ment of  their  claims  out  of  the  proceeds  of  the  copartnership 
property  before  any  of  those  proceeds  can  be  devoted,  either 
to  the  separate  use  or  appropriated  to  the  payment  of  the 
separate  debts  of  any  of  the  members  of  the  firm.  The 
derivative  right  is  the  right  of  the  creditor — it  belongs  to 
him — and  the  partners  have,  if  insolvent,  no  power  or  au- 
thority to  destroy  or  impair  it  to  his  injury  or  prejudice. 


FRANKLIN  SUGAR  CO.  v.  HENDERSON  755 

This  is  so  in  the  very  nature  of  things.  Any  act,  therefore, 
of  the  partners  which  is  destructive  of  this  right  of  the 
creditor  and  which,  as  a  result,  hinders,  delays  and  interferes 
with  his  assertion  of  it  and  impedes  his  ability  to  realize, 
through  its  enforcement,  the  payment  of  the  debt  due  to  him 
by  the  firm,  is,  by  operation  of  law,  a  fraud  upon  the  credit- 
or if  the  copartnership  is  itself  insolvent.  This  principle  has 
been  often  applied.  In  a  number  of  cases  it  has  been  held, 
and  it  may  certainly  be  regarded  as  the  law  of  Maryland  to- 
day, that  the  conversion  of  the  firm's  assets  into  individual 
assets  by  an  assignment  from  one  partner  of  all  his  interest 
in  the  concern  to  another,  works  a  conversion  of  the  property 
from  joint  to  separate  property,  and  when  the  firm  is  in- 
solvent, operates  to  hinder,  delay  and  defraud  the  firm's 
creditors,  if  the  transfer  be  permitted  to  stand.  It  is  obvious 
that  this  must  be  so.  As  the  creditor's  preference  or  priority 
to  be  paid  out  of  the  joint  property  can  only  be  worked  out 
through  the  partner's  right  to  have  that  property  applied  in 
the  first  instance,  to  the  payment  of  the  firm's  creditors ;  and 
as  the  individual  creditors  have  a  prior  right  to  require  that 
the  separate  estate  shall  be  first  applied  to  the  satisfaction  of 
the  individual  debts,  it  necessarily  follows  that  the  conversion 
of  the  joint  property  into  separate  property,  if  sustained, 
would,  when  the  firm  and  its  members  are  insolvent,  destroy 
the  right  of  the  partnership  creditors  to  a  preference  over 
the  creditors  of  the  individual  partner  to  whom  the  assets 
had  been  transferred ;  because  when  the  assets  cease  to  be 
joint  assets  the  right  of  the  partner  to  have  them  applied  to 
the  payment  of  partnership  debts  is  gone,  and  when  that  right 
is  gone  the  derivative  right  of  the  firm's  creditor  is  ex- 
tinguished. This  being  the  consequence  of  such  a  transfer  of 
the  assets,  the  transfer  itself,  when  the  firm  is  insolvent,  is 
inhibited  and  is  deemed  ineffectual  to  convert  the  joint  prop- 
erty into  separate  property  as  against  the  firm's  creditors. 
Collier  v.  Hanna,  yi  Md.  261 ;  Darby  v.  Gilligan,  33  W.  Va. 
249 ;  6".  C.  with  notes,  6  L.  R.  A.  740. 

Whilst  this  principle  is  not  denied  as  being  applicable  to 


756  FRAUD  ON  CREDITORS 

a  case  where  a  transfer  has  been  attempted  by  one  or  more 
partners  to  another  singly,  it  is  insisted  that  it  has  no  rela- 
tion to  a  case  where  the  transfer  has  been  made  by  a  retiring 
partner  to  two  or  more  of  his  copartners  who  continue  busi- 
ness; and  the  reason  assigned  is  that  the  joint  assets  are 
not,  by  such  a  transfer,  converted  into  separate  assets  but 
remain  the  joint  property  of  the  copartners  to  whom  they 
are  transferred.  The  difference  in  the  facts  does  not  pro- 
duce a  difference  in  the  result,  so  far  as  respects  the  cred- 
itors. By  the  express  agreement  of  the  three  partners  and 
by  the  withdrawal  of  Henderson  from  the  firm  the  copart- 
nership of  Henderson,  Pfeil  and  Company  was  dissolved 
at  the  close  of  business  on  the  fourth  day  of  October, 
eighteen  hundred  and  ninety-five.  The  new  copartnership 
was  at  once  formed  and  under  the  transfer  from  Henderson 
assumed  to  acquire  all  his  rights  and  title  to  the  old  firm's 
property.  The  transfer  of  the  old  firm's  whole  assets  to  the 
new  firm,  if  valid,  as  effectually  precluded  the  old  firm's 
creditors  from  asserting  their  derivative  right  through  the 
equity  of  the  old  firm's  members  as  though  the  assets  had 
been  converted  into  the  separate  assets  of  one  member ; 
because,  whilst  in  the  latter  instance  the  right  would  have 
been  lost  by  reason  of  the  separate  creditors  being  preferred, 
in  the  other  instance  the  old  firm's  creditors'  right  would 
have  been  lost  by  being  either  subordinated  to  the  claims  of 
the  new  firm's  creditors,  or,  by  being  placed  on  an  equal 
footing  with  it.  17  Am.  &  Eng.  Ency.  Law,  978,  979  and 
notes  I,  2,  3;  Huiskamp.  v.  Moline  Wagon  Co.,  121  U.  S. 
310. 

It  is  not  solely  because  the  transfer  by  one  to  another 
partner  converts  the  joint  into  separate  property  that  such 
a  transfer  is,  when  the  firm  is  insolvent,  prohibited  as  against 
the  joint  creditors;  but  it  is  because  by  such  a  conversion, 
if  effective,  the  equity  of  the  joint  creditors  to  have  a 
priority  through  the  lien  of  the  partners  would  be  destroyed. 
The  destruction  of  this  lien  and  the  consequent  extinguish- 
ment of  the  creditor's  derivative  equity,  is  the  injurious  act 


FRANKLIN  SUGAR  CO.  v.  HENDERSON  757 

— it  is  the  detrimental  cud;  the  transfer  itself  is  merely 
the  means  by  which  that  end  is  accomplished.  The  law 
levels  its  inhibition  at  the  means  merely  because  the  end 
worked  out  by  those  means  is  injurious.  The  results  are 
the  things  with  wdiich  it  is  chiefly  concerned.  If  the  equity 
of  the  joint  creditor  is  destroyed  by  a  transfer  that  does  not 
convert  joint  into  separate  property,  the  result  to  the  credi- 
tor is  precisely  the  same  as  though  the  joint  had  been  con- 
verted into  separate  assets ;  and  it  will  not  do  to  say  that 
the  right  of  the  creditor  to  relief  depends  on  the  manner  in 
which  the  means  employed  to  defeat  him  may  produce 
their  result,  rather  than  on  the  ultimate  fact  that  he  has  in 
reality  been  defeated  by  those  means.  And  so  whilst  a  trans- 
fer of  all  his  interest  by  one  to  two  other  members  of  an 
insolvent  firm  may  not  convert  what  was  joint  into  separate 
property;  it  nevertheless  does,  if  effective  at  all,  by  divest- 
ing that  property  out  of  the  old  and  vesting  it  in  the  new 
firm,  as  completely  defeat  the  equity  of  the  old  firm's  cred- 
itors and  subordinate  that  equity  to  the  equity  of  the  cred- 
itors of  the  new  firm;  or,  place  the  equity  of  the  latter  on 
an  equality  with  that  of  the  former. 

We  have  just  said  that  the  transfer  by  one  to  two  other 
members  of  an  insolvent  firm  conveying  the  retiring  part- 
ner's interest  in  the  joint  property,  /'/  effective  at  all  as 
against  the  creditors  of  the  firm,  is  prejudicial  to  their 
equity.  But  is  such  a  transfer  any  more  effective  when 
assailed  than  the  transfer  from  one  or  more  to  another 
member  of  such  a  firm  would  be?  In  Collier  v.  Hanna, 
supra,  we  held  that  a  transfer  from  one  to  another  member 
of  an  insolvent  firm  cannot  be  upheld  against  the  firm's 
creditors,  and  precisely  the  same  conclusion  must  be  reached 
in  the  other  instance.  Thus  in  Peyser  v.  Myers,  135  N.  Y. 
599,  there  were  two  sets  of  creditors,  there  was  a  change 
in  the  firm,  and  in  discussing  the  respective  rights  of  these 
creditors  the  Court  said :  "The  priority  of  the  lien  of  firm 
creditors  is  jiot  divested  by  a  transfer  by  an  insolvent  firm 
of  the  firm  assets  to  one  or  more  of  the  partners,  nor  can 


758  FRAUD  ON  CREDITORS 

it  be  effected,  as  we  conceive,  by  any  mere  change  in  the 
personnel  of  the  firm,  as  by  the  withdrawal  of  one  partner 
from  the  firm  or  the  introduction  of  a  new  member."  See 
also  Phelps  v.  McNcaly,  66  Mo.  554;  Thayer  v.  Humphrey, 
91  Wis.  276;  30  L.  R.  A.  549. 

It  was  said  in  the  argument  that  no  case  could  be  found 
w^here  the  doctrine  announced  in  Collier  v.  Hanna  had  been 
applied  to  the  state  of  facts  presented  by  this  record — that 
is,  where  a  retiring  partner  had  transferred  his  interest  in 
the  social  assets  to  two  or  more  remaining  members  of  the 
firm.  But  it  is  not  material  whether  a  parallel  case  can  be 
cited  or  not — we  are  not  dealing  with  precedents,  but  with 
principles;  and  if  the  legal  principle  underlying  the  one  state 
of  facts  is  applicable  to  and  fits  the  other  state  of  facts,  the 
mere  circumstance  that  no  adjudged  case  actually  applying 
such  principle  can  be  produced,  furnishes  no  reason  for  re- 
fusing to  make  the  application  when  the  occasion  does  arise. 
But  the  case  oi  Peyser  v.  Myers,  supra,  distinctly  recognizes 
the  doctrine  as  applicable  to  such  a  case  as  this. 

This  brings  us  to  the  deed  of  trust,  and  in  the  light  of 
what  has  been  just  stated  we  are  to  determine  whether  its 
legal  effect  is  to  hinder  and  delay  the  creditors  of  the  old 
firm,  and  whether,  therefore,  it  is  in  law  fraudulent  and 
invalid  as  to  those  creditors.  The  whole  discussion  thus 
far  has  proceeded  upon  the  theory  that  the  firm  of  Hender- 
son, Pfeil  and  Company,  was  insolvent  on  October  the 
fourth,  eighteen  hundred  and  ninety-five ;  and  what  we  have 
said  must  be  understood  in  that  view;  and  as  the  ultimate 
decision  of  these  cases  hinges  on  the  question  of  solvency, 
we  now  proceed  to  consider  that  question  before  examining 
the  terms  of  the  deed  of  trust. 

Henderson  retired  from  the  old  firm  on  Friday,  October 
the  fourth.  The  new  firm  took  charge  at  the  close  of  busi- 
ness on  that  day.  They  continued  in  business  until  Mon- 
day the  fourteenth,  when  the  deed  of  trust  was  made. 
Excluding  the  two  intervening  Sundays — the  sixth  and  the 
thirteenth — they  conducted  the  business  for  just  seven  days. 


FRANKLIN  SUGAR  CO.  v.  HENDERSON  759 

On  Saturday  the  twelfth  of  October — the  last  of  those  seven 
days — the  new  firm  was,  as  a  matter  of  fact,  no  worse  off 
financially  that  it  had  been  on  the  preceding  fourth  of  the 
same  month.  This  is  distinctly  stated  in  the  evidence  of 
Pfeil  and  nowhere  controverted.  On  the  fourteenth,  when 
the  deed  of  trust  was  executed,  the  firm's  financial  condi- 
tion had  not  changed  from  what  it  was  the  prior  Saturday. 
As  its  condition  on  the  fourteenth  was  no  worse  financially 
than  on  the  fourth,  if  it  was  insolvent  on  the  fourteenth  it 
could  not  have  been  solvent  on  the  fourth.  That  it  was 
insolvent  on  the  fourteenth  is  abundantly  evident  from  the 
recitals  in  the  deed  itself  and  from  the  statement  of  its  lia- 
bilities and  assets  furnished  by  the  trustee  to  the  creditors. 
Its  liabilities  on  the  fourteenth  were  over  fifty-six  thousand 
dollars ;  and  its  actual  assets  were  something  over  thirty-one 
thousand  dollars — which  were  afterwards  swelled  some  five 
thousand  dollars  by  book  accounts  collected,  but  were  dimin- 
ished in  the  neighborhood  of  three  thousand  dollars  by  a  sale 
of  the  plant  at  less  than  the  estimated  value.  Its  liabilities 
were  far  in  excess  of  its  assets  when  the  assignment  to 
Mr.  Wolff  was  made,  and  it  was  no  worse  off  financially 
then  than  when  Henderson  withdrew  ten  days  pre- 
viously. Its  collapse  in  seven  business  days  with  no  cause 
existing  to  produce  that  result  other  than  the  demand  of 
some  of  the  old  firm's  creditors  for  the  payment  of  overdue 
debts,  conclusively  shows  that  it  was  utterly  insolvent — un- 
able to  pay  its  debts  when  due  and  demandable — at  the  time 
Henderson  retired;  especially  as  at  the  time  the  deed  was 
executed  the  firm  was  confessedly  no  worse  off  financially 
than  it  had  been  on  October  the  fourth.  We  are  convinced, 
then,  that  both  the  old  and  the  new  firms  were  insolvent  on 
October  the  fourth. 

The  deed  of  trust,  as  we  have  seen,  was  signed  only  by 
Pfeil  and  McDonald  and  made  provision  solely  for  the  pay- 
ment of  the  debts  due  by  the  copartnership  composed  of 
those  two  individuals.  The  quotations  we  have  made  from 
the    deed    are    quite    sufficient    to    show    this    conclusively. 


760  FRAUD  ON  CREDITORS 

The  deed  thus  undertakes  to  treat  the  assets  which  the 
trustee  claims  under  it — and  they  are  largely  the  assets 
which  belonged  to  the  old  firm — as  the  property  of  the  new 
firm;  and  it  further  undertakes  to  appropriate  those  assets 
to  the  payment  of  the  new  firm's  debts  without  the  slightest 
regard  to  the  rights  of  the  creditors  of  the  old  firm  who  are 
not  creditors  of  the  new  concern.  Had  the  transfer  by 
Henderson  been  made  by  himself  and  by  one  other  member 
of  the  firm  to  the  remaining  member,  the  firm  itself  be- 
ing insolvent;  and  had  the  purchasing  member  executed  a 
deed  of  trust  providing  for  the  payment  of  his  debts,  the 
deed  would,  under  these  circumstances,  have  been  invalid. 
Collier  V.  Hanna,  supra ;  Gable,  Trustee,  v.  Williams,  59 
Md.  53.  For  the  reasons  we  have  already  suggested,  the 
mere  fact  that  the  transfer  by  Henderson  was  made  to  two 
members  of  the  old  firm,  does  not  rescue  the  deed  from 
condemnation.  The  deed  entirely  ignores,  and  if  effect 
were  given  to  it,  it  would  utterly  destroy  the  privilege  or 
preference  to  which  the  creditors  of  the  old  firm  are  entitled, 
of  having  the  debts  due  to  them  paid  out  of  the  assets  of 
the  old  firm;  and  it  would  destroy  this  preference  notwith- 
standing no  transfer  by  any  member  of  an  insolvent  firm  to 
the  other  members  thereof  can  be  efficacious  to  defeat  the 
rights  of  such  creditors.  The  deed  expressly  dedicates  the 
property  conveyed  by  it  to  the  payment  of  the  creditors  of 
the  grantors.  This,  Pfeil  and  McDonald  had  no  right  to  do. 
The  insolvency  of  the  old  firm  at  the  time  of  Henderson's 
attempted  transfer  of  his  interest  therein  to  his  copartners 
prevented  that  transfer  from  becoming  effective  as  against 
•  the  right  of  the  creditors  of  Henderson,  Pfeil  and  Company 
to  work  out  their  equities  through  the  lien  of  the  partners; 
and,  therefore,  did  not  vest  the  title  in  the  remaining  part- 
ners as  a  bona  fide  sale  by  a  partner  of  a  solvent  concern 
would  have  done.  The  transfer  by  Henderson  to  Pfeil  and 
McDonald  did  not  clothe  the  latter  with  a  title  which  they 
could  by  a  deed  of  trust  convey  for  the  benefit  of  their  cred- 
itors alone ;  and  consequently  the  deed  of  trust,  which  by 


FRANKLIN  SUGAR  CO.  v.  HENDERSON  761 

its  terms  excludes  the  creditors  of  the  old  lirm,  is  a  convey- 
ance that  hinders,  delays  and  defrauds  those  creditors.  The 
deed  is,  and  can  therefore  be,  no  barrier  to  the  condemna- 
tion of  the  credits  attached  in  the  hands  of  the  trustee. 

The  pro  forma  order  quashing  the  attachments  will  be 
reversed  and  the  cases  will  be  remanded  for  further  proceecl- 
ings ;  and  it  is  accordingly  so  ordered.^ 


"  Compare  with  this  case  and  the  three  preceding  cases  the  fol- 
lowing : 

A.  Where  the  assignment  took  place  when  apparently  neither 

the  firm  nor  the  assignee  partner  was  insolvent. 

McGozi'U  V.  Sprague,  22,  Ala.  524,  1853  (A  and  B  were  partners. 
A  retired  and  sold  out  his  entire  interest  to  B.  B  left  with  most  of 
the  property  and  without  paying  the  debts.  A  brought  a  bill  in  equity 
on  behalf  of  himself  and  the  firm  creditors  to  have  a  receiver  for  the 
property  left  by  B  appointed,  and  for  an  order  to  apply  such  of  the 
property  as  had  been  firm  property  to  the  payment  of  firm  debts. 
Granted,  one  Judge  dissenting). 

Andrews  v.  Mann,  31  Aliss.  322,  1856  (A  and  B  were  partners.  A 
sold  his  interest  in  partnership  property  to  C,  who  promised  to  pay 
A's  portion  of  partnership  debts.  C  sold  the  interest  thus  acquired  to 
-B,  who  used  the  property  to  pay  his  individual  debts.  A  brought  his 
bill  against  B,  C,  and  the  assignee  of  the  goods,  to  enforce  his,  A's, 
lien  on  them  for  the  payment  of  firm  debts.     Bill  dismissed). 

Coffin  v.  McCnllough,  30  Ala.  107,  1857  (A  and  B  were  partners. 
A  new  partner  was  added  to  the  firm,  and  A  and  B  were  credited 
equally  on  the  books  of  the  new  firm  with  the  stock  of  goods  on  hand 
as  their  respective  shares  in  the  new  firm.  A  died,  and  his  adminis- 
trator obtained  a  decree  for  his  share  of  the.  partnership  effects.  B 
brought  a  bill  in  equity  to  subject  the  interest  of  A's  estate  in  the 
second  firm,  to  pay  the  debts  of  the  original  firm.     Bill  dismissed). 

B.  Where  the  assignment  took  place  when  the  firm  was  solv- 

ent but  the  a:.signee  partner  insolvent. 

Hapgood  v.  Cornwcll,  48  111.  64,  1868  (A,  B  and  C  were  partners. 
D,  trustee  for  E,  the  wife  of  A,  had  loaned  A  considerable  sums  from 
the  trust  estate.  D,  fearing  for  his  loan,  suggested  to  A  that  he.  A, 
buy  out  B's  and  C's  interests  in  the  firm  and  apply  the  firm  property 
to  the  payment  of  the  debt  due  him,  D,  as  trustee.  This  suggestion 
was  acted  on.  F,  et  al.,  secured  a  Judgment  against  the  firm  and 
brought  a  bill  against  D  and  the  members  of  the  firm  to  have  D  pay 
F,  et  al.,  the  amount  of  the  Judgment.     Bill  dismissed). 

Stanton  v.  IVestovcr,  loi  N.  Y.  265,  1886  (A  and  B  were  partners. 
The  partnership  was  solvent.  B  was  insolvent  though  this  fact  was 
unknown  to  A  and  B.  A  assigned  his  interest  in  the  partnership  prop- 
erty to  B,  B  giving  A  some  outside  property  and  A  and  B  each  agree- 
ing to  pay  one-half  of  the  partnership  debts.  B  continued  the  busi- 
ness for  five  months,  then  executed  two  mortgages  on  the  property 
assigned  to  him  to  secure  his  individual  debts,  and  subsequently  made 
a  general  assignment  for  the  benefit  of  creditors.  C,  a  receiver  of  the 
joint  property  appointed  in  a  proceeding  brought  by  the  firm  creditors, 
brought  a  bill  to  have  all  these  transactions  set  aside.  Bill  dismissed. 
Finch,  J.:  "The  insolvency  of  the  purchasing  partner,  if  known  to  him 
and  to  the  seller,  might  very  well  be  strong  evidence  of  an  intent  to 
defraud  the   partnership   creditors,   and   become   conclusive    upon   that 


762  FRAUD  ON  CREDITORS 

question  if  there  was  no  explanation.  But  here  the  purchasing  part- 
ner supposed  himself  to  be  solvent,  and  was  so  believed  to  be  by  the 
seller/'  p.  269). 

C.  Where   assignment   took   place   when   the   firm,    and   appar- 

ently   the    individual    members     thereof,    were    insolvent, 
though  the  insolvency  of  the  firm  was  not  known  to  the 
partners. 
Allen  V.  The  Center  Valley  Co.,  21  Conn.  130,  1851  (A  and  B  were 
partners.     The  assets  were  not  sufficient  to  pay  the  debts,  but  the  busi- 
ness was  a  going  one,   and  the   financial  condition   of   the  partnership 
was  unknown  to  the  C  Co.     A  and  B  sold  to  the  C  Co.  an  engine  and 
other  property  belonging  to  the  firm,  A  and  B  each  receiving  as  indi- 
viduals 40  shares  in  the  C  Co.     A  and  B  became  openly  insolvent  and 
stopped  business.     Held,  that  the   firm  creditors   could  not   invalidate 
the  sale,  nor  have  the  shares  regarded  as  firm  assets). 

Ex  parte  Mayou,  4  De  J.  &  Sm.  664,  1865  (A  and  B  were  part- 
ners. They  were  each  insolvent  and  the  firm  was  also  insolvent.  A 
assigned  to  B  his  interest  in  the  firm,  B  undertaking  to  pay  the  firm 
debts.  The  firm  was  declared  bankrupt.  Held,  that  the  transfer  was 
void,  and  that  the  assets  assigned  should  be  regarded  as  firm  assets. 
Westbury,  L.  C. :  "My  strong  impression  therefore  is  that  this  trans- 
action, had  it  been  made  the  subject  of  judicial  decision  before  the 
statute  of  bankruptcy  which  introduced  these  words,  'fraudulent  grant 
or  conveyance  of  any  lands,  tenements,  goods  or  chattels  with  intent 
to  defeat  or  delay  creditors,'  would  not  have  been  denominated  a  real, 
that  is  a  boiia  fide  transaction,  and  therefore  would  not  have  been  held 
valid  according  to  the  purport  of  Lord  Eldon's  judgments  in  Ex  parte 
Ruffin  and  Ex  parte  Williams,  for  I  regard  his  references  to  bona  fides 
as  being  nothing  more  than  a  short  expression  of  that  principle,  which 
has  been  expanded  more  fully  into  the  form  now  found  in  the  67th 
section  of  the  Act  of  1849.") 

Singer  v.  Carpenter,  125  111.  117,  1888  (A,  B,  et  a/.,  were  partners. 
The  partnership  was  insolvent  but  this  fact  was  unknown  to  the  part- 
ners. They  entered  into  an  agreement  with  C,  et  at.,  to  join  with  C, 
et  al.,  in  the  formation  of  a  corporation,  transfer  the  property  of  the 
firm  to  the  corporation,  and  each  receive  as  individuals  shares  of  stock 
in  the  corporation.  Before  the  transaction  was  completed  A  died  and 
the  shares  awarded  to  him  were  delivered  to  his  executors,  who  sold 
them  for  the  benefit  of  A's  estate.  Bill  by  firm  creditors  to  have  pro- 
ceeds of  sale  applied  to  the  satisfaction  of  their  claims  to  the  exclu- 
sion of  the  separate  creditors  of  A.     Bill  dismissed). 

D.  Where  assignment  took  place  when  the  firm  and  the  indi- 

vidual members  were  insolvent  and  the  fact  of  insolvency 
was  known  to  the  partners. 

Ransom  v.  Van  Deventer,  41  Barb.  307,  1863  (A  and  B  were  part- 
ners. They  were  insolvent.  A  was  indebted  to  the  firm  in  a  greater 
amount  than  B.  The  firm  sold  property  to  C,  who  gave  his  notes. 
A,  to  equalize  B's  indebtedness  to  the  firm  permitted  B  to  take  one  of 
these  notes  and  give  it  to  D,  in  payment  of  a  debt  owing  by  B  to  D. 
D  took  the  note  with  knowledge  of  all  the  facts.  Held,  that  E,  a  Judg- 
ment creditor  of  the  firm,  could  in  equity  have  the  assignment  of  the 
note  to  D  set  aside,  and  the  proceeds  of  the  note  applied  to  the  pay- 
ment of  firm  debts.) 

Goddard-Peck  Grocery  Co.  v.  McCiine,  122  Mo.  426,  1894  (A  and 
B  were  partners.  A  had  borrowed  his  partnership  contribution  from 
C  and  had  given  C  his  individual  note.  The  firm  was  insolvent  and 
this  fact  was  known  or  suspected  by  the  partners.  A  and  B  gave  a 
firm  note  to  C  in  lieu  of  A's  individual  note.  Some  six  months  later 
the  firm  failed.  Held,  that  C  was  a  creditor  of  the  firm ;  on  the  ground 
that  the  firm  assets  could  have  themselves  been  used  to  pay  the  indi- 


FRANKLIN  SUGAR  CO.  z:  HENDERSON  763 

vidual  debts  of  one  of  the  partners  with  the  consent  of  all  the  part- 
ners. Barclay,  J.,  concurred  on  the  ground  that  the  consideration 
given  by  C  was  property  which  had  been  used  by  the  firm  and  there- 
fore, there  was  a  meritorious  consideration   for  the  firm  note). 

Compare  the  folloiving  cases  in  zvliich  the  individual  creditors  of 
the  assignor  partner  objected  to  the  assignment. 

Hamill  v.  Willett,  6  Bosw.  533,  i860  (A  and  B  were  partners-. 
They  dissolved,  B  assigning  all  his  interest  to  A,  A  agreeing  toj)ay 
the  firm  debts.  A  continued  in  business,  used  the  firm  name,  and 
employed  B.  The  property  was  levied  on  by  C,  an  individual  creditor 
of  B's.  Held,  in  an  action  by  A  against  C  to  recover  possession  of 
the  property,  that  the  jury  were  not  justified  from  the  above  recited 
facts  in  finding  that  the  assignment  by  B  of  his  interest  in  the  firm 
property  was  in  fraud  of  his,  B's,  individual  creditors). 

Griffin  v.  Cranston,  10  Bosw.  i,  1862  (A  and  B  were  partners  in  a 
hotel.  A  was  insolvent,  as  also  the  partnership,  and  A  was  indebted 
to  the  firm  in  a  large  amount.  A  assigned  all  his  interest  in  the  firm 
lo  B,  B  agreeing  to  pay  the  firm  debts,  and  also  employ  A  and  his 
wife  in  the  hotel,  lodge  them,  and  pay  them  a  share  in  the  profits  if 
any.  C,  an  individual  creditor  of  A's,  brought  an  action  against  B 
and  A  to  set  aside  the  assignment.  Held,  that  the  facts  did  not  show 
that  the  assignment  was  fraudulent  as  to  B's  individual  creditors,  or 
that  the  beneficial  use  of  the  property  granted  to  B  created  any  trust 
in  the  property  for  B.     Judgment  for  defendants  confirmed). 

When  one  partner  assigns  to  another  partner  his  interest  in  the 
firm  property  and  the  assignee  partner  covenants  to  use  the  firm  prop- 
erty to  pay  the  firm  debts,  a  trust  in  the  property  assigned  is  created  for 
the  benefit  of  the  partnership  creditors. 

Wildes  V.  Chapman,  4  Eds.  Ch.  669,  1846  (A  and  B  were  in  part- 
nership, B  retired  and  A  covenanted  to  apply  the  property  of  the  firm 
to  pay  its  debts.  C,  et  al.,  firm  creditors,  brought  bill  against  D,  as- 
serting that  A  in  fraud  of  the  plaintiffs  had  conveyed  the  firm  prop- 
erty to  D;  and  praying  that  the  property  might  be  applied  to  the  pay- 
ment of  firm  debts.     Demurrer  of  D  overruled). 


764  FRAUD  ON  CREDITORS 


In  re  HEAD. 

In  the  United  States  District  Court  for  the  Western 
District  of  Arkansas,  1902. 

114  Federal  Reporter,  489. 

In  Bankruptcy.  On  review  of  action  of  referee  disal- 
lowing exemptions  claimed  by  bankrupts. 

Rogers,  District  Judge :  Clyde  Head  and  Charles  P. 
Smith  were  merchants  at  Richmond,  Ark.,  under  the  firm 
name  and  style  of  Head  &  Smith.  They  fonned  their  co- 
partnership and  entered  into  business  on  the  ist  of  January, 

1 90 1,  neither  one  of  the  partners  having  any  capital.  They 
purchased  the  remnants  of  two  small  secondhand  stocks  of 
goods  on  credit,  and  their  purchases  were  subsequently  made 
on  credit,  and  the  scope  of  their  business  was  largely  the 
furnishings  of  supplies  to  a  large  planter  near  by.  They  con- 
tinued in  business  until  the  14th  of  January,  1902;  when 
they  dissolved.  Both  parties  testified  that  the  immediate 
cause  of  their  dissolution  was  a  notice  from  said  planter 
that  he  did  not  intend  to  patronize  them  during  the  year 

1902.  The  partner  Head  took  for  his  share  2  horses,  i 
buggy,  25  bushels  of  corn,  and  some  harness;  the  partner 
Smith  took  the  merchandise  and  open  accounts,  and,  indeed, 
all  the  other  assets  of  the  firm,  nominally  $4,000,  and  as- 
sumed the  debts  of  the  concern,  amounting  to  in  the  neigh- 
borhood of  $3,500.  Smith  testifies  that  he  believed  when 
he  took  the  business  that  he  could  carry  it  on  and  pay  the 
debts.  He  at  once  notified  the  creditors  of  the  dissolution, 
and  applied  for  an  extension.  He  failed  in  that,  and  on 
the  7th  of  February,  1902,  creditors  filed  their  petition  in 
bankruptcy  against  the  firm,  after  both  partners  had  stated 
in  writing  that  they  were  insolvent,  and  expressed  a  willing- 
ness to  go  into  bankruptcy.  Head  was  a  single  man ;  Smith 
married  after  the  partnership  was   formed,   and  before  it 


IN  RE  HEAD  765 

dissolved.  No  inventory  of  the  stock  was  taken  when  the 
dissokition  took  place,  but  they  estimated  the  stock  would 
invoice  at  between  $4,000  and  $4,500.  After  the  dissolution 
Smith  bought  some  goods,  sold  others,  and  paid  some  small 
firm  debts.  Smith  had  no  property  except  the  assets  of  the 
dissolved  firm,  and  no  means  of  raising  money  to  pay  the 
creditors  except  by  a  sale  of  the  goods.  Head  testifies  that 
after  the  firm  was  dissolved  he  had  no  further  connection 
with  it ;  that  he  thought  Smith  would  be  able  to  take  charge 
of  the  stock,  pay  the  debts,  and  continue  the  business ;  they 
neither  had  any  idea  of  going  into  bankruptcy;  they  both 
thought  Smith  could  make  sufficient  arrangements  to  get 
time  and  convert  the  goods  into  cash;  that  they  estimated 
the  goods  would  invoice  $4,250,  and  liabilities  in  the  neigh- 
borhood of  $3,600. 

On  this  state  of  proof  the  referee  found  the  partner- 
ship was  insolvent  when  the  dissolution  occurred,  and  in 
that  finding  of  facts  the  Court  concurs.  If  this  transaction 
is  upheld,  its  inevitable  effect  is  that  the  mere  act  of  the 
dissolution  of  the  partnership  converts  all  the  partnership 
assets  into  individual  assets  of  the  respective  parties,  thereby 
enabling  each  partner,  not  only  to  claim  exemptions  out  of 
the  partnership  assets  in  violation  of  the  exemption  laws 
of  Arkansas  as  construed  by  its  own  courts  (Richardson  v. 
Adlcr,  46  Ark.  43),  but  also  to  pay  their  respective  indi- 
vidual creditors  out  of  the  partnership  assets  to  the  ex- 
clusion of  the  partnership  creditors,  in  plain  violation  of 
the  express  provisions  of  the  bankrupt  law  (Bankr.  Act 
1898,  §  5).  Moreover,  its  effect  is  to  enable  the  individual 
creditors  to  gain  an  advantage  over  the  other  creditors, 
which  they  did  not  have  until  the  firm  was  dissolved.  It 
was,  in  effect,  a  gift  by  the  insolvent  firm  to  the  creditors 
of  the  individual  members  of  the  firm,  and  therefore  a  pref- 
erence to  them  over  the  partnership  creditors,  who  under 
the  bankrupt  law  and  in  equity  and  good  conscience  were 
entitled  to  have  the  partnership  assets  appropriated  to  the 
payment  of  the  partnership  debts,  to  the  exclusion  of  the 


766  FRAUD  ON  CREDITORS 

individual  creditors  of  the  respective  partners.  Nor  will  it 
do  to  say  that  the  members  of  this  firm  acted  in  good  faith 
in  what  they  did ;  that  they  did  not  intend  to  hinder,  delay, 
or  defraud  their  creditors.  Every  man  must  be  held  in 
law  to  have  intended  that  which  was  the  necessary  and  in- 
evitable result  of  his  acts,  and  the  dissolution  of  an  insolvent 
firm,  if  valid,  is,  in  effect,  an  appropriation  by  the  firm  of  the 
firm  assets,  which  in  equity  and  under  the  bankrupt  law 
should  be  appropriated  to  the  payment  of  the  firm  creditors, 
to  the  payment  of  the  debts  of  the  individual  members 
thereof.  The  firm,  and  the  members  thereof,  must  there- 
fore be  held  to  have  intended  that  very  result,  and  this  the 
bankrupt  law  forbids. 

The  injustice  of  such  a  transaction,  and  the  inequitable 
nature  thereof,  is,  in  the  opinion  of  the  Court,  in  direct  con- 
flict with  the  whole  theory  of  the  bankrupt  law.  I  am  of 
the  opinion  that  the  dissolution  of  this  firm,  it  being  in- 
solvent, and  the  withdrawal  therefrom  of  assets  by  the  re- 
spective partners,  to  be  held  as  individual  property,  was  in 
violation  of  section  G/e,  Bankr.  Act  1898,  and  that  the 
Court  should  set  aside  the  terms  of  the  dissolution,  and 
treat  the  assets  of  the  firm  in  the  hands  of  both  partners 
as  partnership  property,  and  to  do  otherwise  is  to  defeat 
the  whole  spirit  and  policy  of  the  bankrupt  law.  I  am  not 
aware  that  this  question  has  been  authoritatively  settled  by 
any  Court  of  Appeals  or  by  the  Supreme  Court  of  the 
United  States,  and  there  appears  to  be  a  conflict  of  author- 
ity upon  the  subject  among  the  District  Courts.  In  support 
of  the  position  assumed  by  the  Court  may  be  cited  In  re 
Cook,  Fed.  Cas.  No.  3,150;  In  re  Byrne,  Fed.  Cas.  No. 
2,270;  In  re  Sauthoff,  21  Fed.  Cas.  (No.  12,380);  Love- 
land,  Bankr.  p.  190;  Coll.  Bankr.  (3d  Ed.)  70;  In  re  Jones 
&  Cook,  4  Am.  Bankr.  R.  141,  100  Fed.  781;  In  re  Gil- 
lette &  Prentice,  5  Am.  Bankr.  R.  119,  104  Fed.  769.  I  am 
aware  that  all  of  these  cases  are  not  directly  in  point,  but 
they  bear  upon  the  principle  involved. 

The  case  of  In  re  Riidnick  (C.  C.)   102  Fed.  751,  is 


IN  RE  HEAD  1(^ 

cited  as  opposing  the  conclusion  reached  by  the  Court.  The 
cases  arc  not  the  same,  but,  if  it  may  be  treated  as  an 
authority  against  the  conclusion  reached  by  the  Court,  I  am 
unable  to  follow  it.  The  action  of  the  referee  in  disallow- 
ing the  claim  of  both  bankrupts  is  affirmed,  and  an  order  will 
be  entered  accordingly. 

The    referee    will    proceed    in    accordance    with    this 
opinion.^ 

^  The  first  part  of  Section  67,  subsection  e,  of  the  Bankrupt  Act 
of  1890,  referred  to  in  the  opinion  reads  as  follows  :  "That  all  con- 
veyances, transfers,  assignments,  or  incumbrances  of  his  property,  or 
any  part  thereof,  made  or  given  by  a  person  adjudged  a  bankrupt 
under  the  provisions  of  this  act  subsequent  to  the  passage  of  this  act 
and  within  four  months  prior  to  the  filing  of  the  petition,  with  the 
intent  and  purpose  on  his  part  to  hinder,  delay,  or  defraud  his  credi- 
tors, or  any  of  them,  shall  be  null  and  void  as  against  the  creditors  of 
such  debtor,  except  as  to  purchasers  in  good  faith  and  for  a  present 
fair  consideration ;  and  all  property  of  the  debtor  conveyed,  trans- 
ferred, assigned,  or  encumbered  as  aforesaid  shall,  if  he  be  adjudged 
a  bankrupt,  and  the  same  is  not  exempt  from  execution  and  liability 
for  debts  by  the  law  of  his  domicile,  be  and  remain  a  part  of  the 
assets  and  estate  of  the  bankrupt  and  shall  pass  to  his  said  trustee, 
whose  duty  it  shall  be  to  recover  and  reclaim  the  same  by  legal  pro- 
ceedings or  otherwise  for  the  benefit  of  the  creditors." 


768  FRAUD  ON  CREDITORS 


In  re  DENNING. 

In  the  United  States  District  Court  for  the  District 
OF  Massachusetts,  1902. 

114  Federal  Reports,  219. 

In  Bankruptcy. 

Lowell,  District  Judge :  The  bankrupt  was  formerly 
in  partnership  with  one  Brown,  doing  business  under  the 
firm  name  of  Brown  &  Denning,  up  to  August  22,  1899. 
On  that  date  they  were  insolvent,  and  may  be  supposed  to 
have  known  their  financial  condition.  On  that  date  Brown 
sold  all  his  interest  in  the  partnership  to  the  bankrupt,  and 
received  from  the  bankrupt  eight  promissory  notes,  of  $100 
each,  without  interest,  payable,  respectively,  in  two,  three, 
four,  five,  six,  seven,  eight,  and  nine  months.  On  October 
25,  1899,  the  bankrupt  filed  his  voluntary  petition.  At  that 
time  the  firm  was  indebted  to  the  amount  of  about  $1,100. 
The  assets  in  the  bankrupt's  hands  were:  (a)  Proceeds  of 
the  sale*  of  the  business  plant  formerly  owned  by  the  firm 
and  transferred  to  the  bankrupt  as  above  set  forth ;  (b)  pro- 
ceeds of  the  collection  of  debts  arising  from  the  sale  of 
goods  by  the  firm;  (c)  proceeds  of  a  contingent  interest 
in  real  estate  inherited  by  the  bankrupt;  (d)  money  re- 
ceived for  goods  sold  by  the  bankrupt  after  the  partnership 
was  dissolved.  Brown  proved  the  promissory  notes  above 
stated  without  objection.  The  trustee  moved  to  expunge 
the  claim,  which  motion  the  referee  allowed,  and  the  claim 
was  expunged.     Brown  now  seeks  a  review. 

It  is  plain  that  the  bankrupt's  former  partner  cannot  be 
allowed  to  prove  in  this  case.  To  permit  him  to  do  so  would 
permit  him  to  compete  with  his  own  creditors.  Under  a 
separate  commission  like  this,  joint  creditors  may  prove, 
and,  at  the  least,  they  may  share  in  the  surplus  of  the  sepa- 
rate estate  after  payment  of  the  separate  debts.     There  are 


IN  RE  DENNING  769 

joint  creditors  in  this  case  who  have  proved,  and,  until  the 
claims  of  the  joint  creditors  are  settled,  Brown  cannot  share 
in  the  distribution  of  his  former  partner's  estate.  Lowell, 
Bankr.  §  133;  Amsinck  v.  Bean,  22  Wall.  395,  402,  22  L. 
Ed.  801.  There  is  nothing  in  section  5g  of  the  act  to  change 
this  well-established  rule. 

Certain  creditors  of  the  firm  seek  to  prove  their  claims 
against  the  bankrupt  individually,  and,  together  with  the 
separate  creditors,  to  share  in  the  estate  now  in  the  hands 
of  this  Court.  If  they  are  to  be  treated  as  joint  creditors 
only,  and  if  all  the  assets  are  to  be  treated  as  separate  assets, 
they  will  be  entitled  only  to  come  upon  the  surplus  after 
payment  of  the  separate  debts.  In  re  Wilcox  (D.  C.)  94 
Fed.  84.  In  re  Johnson,  Fed.  Cas.  No.  7,369,  2  Lowell, 
129,  it  was  decided  that  joint  creditors  could,  even  after 
bankruptcy,  so  assent  to  the  bankrupt's  undertaking  to  pay 
the  firm  debts  as  to  make  themselves  separate  creditors  of 
the  bankrupt,  and  thus  to  share  alike  with  separate  cred- 
itors in  the  separate  estate.  In  the  same  case  it  was  inti- 
mated that  the  conveyance  of  the  firm  assets  to  one  partner 
was  a  fraudulent  preference,  which  could  be  set  aside  in 
bankruptcy,  and  that  thus  the  assets,  which  originally  be- 
longed to  the  firm,  could  be  brought  back  into  the  estate. 
If  both  these  propositions  are  true,  there  will  be  confusion 
in  working  them  out  together.  Each  joint  creditor  will 
have  an  election  ( i )  to  come  with  the  separate  creditors 
upon  the  separate  estate,  including  that  formerly  joint,  or 
(2)  to  have  the  assets  marshaled,  and  come  with  the  other 
joint  creditors  upon  the  former  joint  estate.  It  seems  that 
a  former  joint  creditor,  who  has  elected  to  become  a  sepa- 
rate creditor  of  the  bankrupt,  assents  to  the  conversion  of 
the  joint  into  separate  assets,  and  is  permitted  to  come  upon 
the  converted  estate  as  a  separate  creditor.  On  the  other 
hand,  a  creditor  who  procures  the  avoidance  of  the  con- 
version and  a  marshaling  of  the  assets  comes  as  a  joint 
creditor  upon  the  property  thus  returned  to  the  joint  estate, 
and  it  is  hard  to  see  how  accounts  can  be  kept  which  treat 


770  FRAUD  ON  CREDITORS 

the  same  property  as  joint  property  for  the  payment  of  some 
claims  and  as  separate  property  for  the  payment  of  others. 
See  St.  Mass.  1865,  c.  113;  Biicklin  v.  Bucklin,  97  Mass. 
256. 

There  are  considerable  difficulties  in  dealing  with  joint 
estate  under  a  separate  commission.  See  In  re  JVilcox  (D. 
C. )  94  Fed.  84.  As  was  there  pointed  out,  courts  of  bank- 
ruptcy at  one  time  permitted  the  creditors  of  the  bankrupt, 
whether  joint  or  separate,  to  come  upon  all  the  estate  in  the 
assignee's  hands,  both  joint  and  separate,  and  share  in  it 
alike,  unless  application  was  made  for  a  separation  of  ac- 
counts. This  application  had  originally  to  be  made,  not  to 
the  court  of  bankruptcy,  but  to  a  court  of  equity.  Some 
courts  of  bankruptcy  in  this  country  have  held  that  the  dis- 
tribution of  joint  estate  among  joint  creditors,  and  of  sepa- 
rate estate  among  separate  creditors,  is  confined  to  cases 
where  the  commission  is  joint.  See  94  Fed.  105.  The  con- 
trary was  held  by  this  Court  In  re  Wilcox,  and  the  prin- 
ciple was  treated  as  of  general  application,  at  least  under 
the  provisions  of  this  bankrupt  act.  The  Court  has,  there- 
fore, to  consider  if  the  assets  in  the  bankrupt's  hands  which 
came  from  the  firm  are  to  be  treated  as  converted  by  the 
transaction  of  August  22d,  or  if  the  conversion  was  avoided 
by  the  adjudication  October  25th. 

It  is  somewhat  difficult  to  construe  the  conversion  as 
a  preference  within  the  terms  of  section  60  of  the  act. 
Under  section  60  only  that  is  a  preference  which  enables  a 
creditor  to  obtain  a  greater  percentage  of  his  debts  than 
other  creditors  of  the  same  class.  If  creditors  are  thus 
classified  exclusively  with  regard  to  the  priorities  established 
by  section  64,  then  the  conversion  of  joint  into  separate 
estate  is  a  preference;  but  it  is  at  least  doubtful  if  joint  and 
separate  creditors  are  "creditors  of  the  same  class".  If 
they  are  not,  then  the  conversion  does  not  enable  any  cred- 
itor to  obtain  a  greater  percentage  of  his  debt  than  any 
other  creditor  of  the  same  class.  The  conversion  enables 
creditors  of  the  separate  class  to  be  paid  in  full,  while  de- 


IN  RE  DENNING  771 

priving  creditors  of  the  joint  class  of  any  payment  whatso- 
ever. Even  in  England,  however,  the  rule  in  Ex  parte  Ruf- 
fin,  6  Ves.  119,  is  subject  to  an  exception  where,  as  here, 
partnership  and  partners  were  insolvent  at  the  time  of  the 
conversion.  Lindl.  Partn.  (2d.  Ed.)  *338.  As  to  the  Amer- 
ican rule,  see  Lowell,  Bankr.  §  139.  Moreover,  section  5'g 
of  the  bankrupt  act  was  intended,  I  believe,  to  clear  up  the 
whole  matter,  and  to  permit  the  Court  to  deal  with  con- 
versions of  this  kind  so  as  not  only  to  prevent  preference 
in  the  technical  meaning  of  that  word,  but  also  so  as  to 
"secure  the  equitable  distribution  of  the  propertv  of  the 
several  estates."  Lowell,  Bankr.  §  468;  In  re  Gillette  (D. 
C.)  104  Fed.  769;  In  re  Shapiro  (D.  C.)  106  Fed.  495. 
That  it  is  highly  inequitable  in  this  case  to  permit  what 
was  joint  estate  before  the  dissolution  of  the  partnership  to 
be  treated  as  separate  estate  in  the  distribution  of  the  bank- 
rupt's effects  is  plain.  To  permit  the  joint  creditors  to  come, 
alike  with  the  separate  creditors,  upon  the  whole  estate, 
even  if  admissible,  seems  to  me  to  cut  the  knot,  rather  than 
to  untie  it.  The  trustee  should  be  directed  to  keep  separate 
accounts,  the  property  belonging  to  the  finn  at  the  time  of 
the  dissolution  of  the  partnership  on  August  22d  should  be 
applied  first  to  the  payment  of  the  joint  debts,  and  the 
separate  estate  of  the  bankrupt  should  be  applied  first  to 
the  payment  of  the  separate  debts.  If  there  is  any  surplus 
in  either  fund,  that  is  to  be  distributed  as  provided  in  section 
5f.  It  is  true  that  section  5h  provides  that,  if  one  partner 
only  is  adjudged  bankrupt,  the  partnership  property  shall 
not  be  administered  in  bankruptcy  unless  by  consent  of  the 
other  partners ;  but  that  provision  has  plainly  no  application 
to  the  case  at  bar. 

The  case  is  remanded  to  the  referee,  with  instructions 
to  proceed  in  accordance  with  this  opinion.^ 


^The  pertinent  part  of  Section  60,  of  the  Bankrupt  Act  of  1898, 
referred  to  in  the  text  is  as  follows  :  "A  person  shall  be  deemed  to 
have  given  a  preference,  if.  being  insolvent,  he  has,  within  four  months 
before  the  filing  of  the  petition,  or  after  the  filing  of  the  petition  and 
before  the  adjudication,  procured  or  sufifered  a  judgment  to  be  entered 


772  FRAUD  ON  CREDITORS 

against  himself  in  favor  of  any  person,  or  made  a  transfer  of  any 
of  his  property,  and  the  effect  of  the  enforcement  of  such  judgment 
or  transfer  will  be  to  enable  any  one  of  his  creditors  to  obtain  a  greater 
percentage  of  his  debt  than  any  other  of  such  creditors  of  the  same 
class." 

The  case  of  In  re  Johnson,  Fed.  Cas.  7,  369,  1872,  arose  under  the 
Act  of  1867  and  was  as  follows:  (A  and  B  were  partners.  A  assigned 
to  B,  B  promising  to  pay  the  debts  of  the  firm.  The  firm  and  both 
partners  were  insolvent  at  the  time  and  within  four  months  B  brought 
a  voluntary  petition  in  bankruptcy.  J.  Lowell,  District  J.,  said :  "The 
better  mode  of  meeting  the  difficulty  [arising  out  of  the  assignment 
and  the  resulting  absence  of  a  joint  fund]  seems  to  me  to  be  to  per- 
mit the  joint  creditors  to  assent  to  the  conversion,  and  thus  to  be- 
come separate  creditors,  even  after  bankruptcy  has  occurred.  The 
decisions  have  been  tending  to  this  point,  though  but  few  have  yet 
reached  it.  The  early  cases  laid  down  the  rigid  rule,  that  there  could 
be  no  substitution  or  conversion  by  which  a  joint  debt  of  two  part- 
ners should  become  the  separate  debt  of  the  remaining  partner;  be- 
cause there  was  no  consideration  for  the  relinquishment  of  the  re- 
sponsibility of  the  retiring  partner.  Lodge  v.  Dicas,  3  Barn.  &  Aid. 
61  r;  David  v.  Ellice,  5  Barn.  &  C.  196.  This  strict  construction,  under 
the  guise  of  protection  to  the  rights  of  the  creditor,  really  destroyed 
them,  in  many  cases ;  and  it  is  now  well  settled,  in  England,  that  if 
the  creditor  has  assented  to  the  change,  whether  expressly  or  by  a 
course  of  dealing,  the  debt  is  severed.  ThoDipson  v.  Percival,  5  Barn. 
&  Adol.  925;  Oakclcy  v.  Pashellcr,  4  Clark  &  F.  207;  Hart  v.  Alex- 
ander, 2  Mees.  &  W.  484;  Lyth  v.  Ault,  7  Exch.  669;  i  Lindl.  Partn. 
[2d  Ed.]  454.  In  bankruptcy,  it  is  always  permitted  to  a  creditor  who 
has  assented  to  the  arrangement  to  prove  against  the  estate  of  the 
substituted  debtor.  Colly.  Partn.  [5th  Am.  Ed.],  Sec.  918;  Robs. 
Bankr.,  p.  508.  Compare  with  cases  cited  supra,  Howe  v.  Lawrence, 
note  2.") 


JACKSON  V.  CORNELL  773 


SECTION  2.— FRAUD  ON  THE  SEPARATE 
CREDITORS  OF  A  PARTNER. 


JACKSON  V.  CORNELL. 
In  the  Court  of  Chancery^  New  York,  1844. 

I  Sandford's  New  York  Chancery  Reports,  348. 

Sandford,  Assistant  Vice-Chancellor  :  The  assignment 
made  by  Cornell  to  the  two  Farringtons  is  alleged  to  be 
fraudulent,  on  various  grounds.  *  *  *  'phe  assignment 
devoted  Cornell's  individual  property  to  the  payment  of  the 
partnership  debts  due  from  him  and  his  assignee,  in  prefer- 
ence to  his  individual  debts.      *     *     *i 

It  is  not  denied  that  the  rule  of  equity  is  uniform  and 
stringent,  that  the  partnership  property  of  a  firm  shall  all  be 
applied  to  the  partnership  debts,  to  the  exclusion  of  the 
creditors  of  the  individual  members  of  the  firm;  and  that 
the  creditors  of  the  latter  are  to  be  first  paid  out  of  the 
separate  effects  of  their  debtor,  before  the  partnership  cred- 
itors can  claim  anything.  See  Wilder  v.  Kcelcr  (3  Paige's 
R.  167);  Egberts  v.  Wood  (3  id.  517);  Payne  v.  Mat- 
thews (6  id.  19)  ;  Hutchinson  v.  Smith  (7  id.  26)  ;  i  Story's 
Eq.  Jur.  625,  §  675. 

It  is,  however,  contended  that  each  partner,  before  a 
lien  attaches  by  judgment,  execution,  or  creditor's  bill,  has 
a  right  with  his  individual  property,  to  give  such  prefer- 
ences to  and  amongst  his  creditors,  as  he  pleases,  whether 
several  or  partnership  creditors. 

^  Only  so  much  of  the  opinion  as  relates  to  the  invalidity  of  such  an 
assignment  is  reprinted. 


774  FRAUD  ON  CREDITORS 

This  is  the  principal  question  in  the  case,  and  it  is  one 
of  great  importance  in  commercial  law.  The  defendant's 
proposition  embraces  the  right,  not  merely  to  pay  the  money 
or  deliver  the  property  of  the  individual  debtor  to  the  part- 
nership creditor  in  discharge  of  his  claim;  or  to  secure  him 
v^ith  a  specific  parcel  of  individual  property.  But  it  extends 
to  the  general  assignment  of  all  the  partner's  separate  estate. 
And  if  he  may,  by  such  an  assignment,  prefer  one  partner- 
ship creditor  to  his  own,  there  is  no  stopping  short  of  per- 
mitting him  to  prefer  all  the  creditors  of  the  firm  to  the 
entire  exclusion  of  the  individual  creditors.     *     *     * 

It  is  well  settled  that  such  a  disposition  of  the  separate 
property  of  the  co-partner  is  inequitable.  It  is  such  an 
appropriation  as  this  court  will  not  suffer,  when  by  reason 
of  insolvency,  the  death  of  a  partner,  or  any  other  cause,  the 
subject  is  brought  within  its  jurisdiction. 

The  vice-chancellor  of  the  eighth  circuit  has  declared 
that  a  partner  cannot  prefer  his  private  debts  with  the  assets 
of  the  co-partnership;  and  the  converse  of  the  rule  must 
be  equally  tn.ie.  And  our  learned  Chancellor  has  gone  so  far 
as  to  say  that  such  an  assignment,  giving  a  preference  to 
a  private  debt,  could  not  be  sustained,  so  far  as  it  provides 
for  the  payment  of  that  debt. 

Let  me  pursue  the  consequences,  in  the  case  of  the  as- 
signment of  the  effects  of  a  co-partnership,  giving  a  prefer- 
ence to  a  private  debt. 

First. — It  is  inequitable,  and  therefore  wrong. 

In  the  next  place,  it  cannot  be  sustained  as  to  the  debt 
so  preferred.  Now,  in  what  manner  is  the  wrong  which 
the  parties  have  attempted  to  perpetrate  on  the  creditors  of 
the  firm,  to  be  prevented  ? 

Not  by  a  mere  appeal  to  the  assignee,  for  he  is  to  be 
governed  by  the  express  directions  of  the  trust  which  he 
has  undertaken  to  execute,  and  would  not  feel  warranted  in 
deviating  from  them,  without  the  sanction  of  the  court. 
Not  by  a  bill  by  the  creditors  for  the  purpose  of  rectifying 
this  particular  grievance,  while  their  demands  still  rest  in 


JACKSON  V.  CORNELL  775 

simple  contract.  The  case  of  Rohb  v.  Stephens  decides  that 
such  a  bill  will  not  be  sustained.  And  while  the  creditors 
are  prosecuting  their  debts  to  judgment,  so  as  to  enable 
them  to  exhibit  a  bill  under  that  decision,  a  pliant  assignee 
of  the  debtor's  own  selection  would  be  very  likely  to  fore- 
stall their  proceedings  by  immediately  paying  off  the  ob- 
noxious private  debt  so  preferred. 

The  result  of  it  is,  that  in  order  to  remedy  the  evil,  it 
will  be  necessary  for  the  creditors  to  resort  to  this  court  for 
an  administration  of  the  whole  trust.  And  if  they  would 
not  wait  until  such  remedy  would  be  fruitless,  their  resort 
must  be  made  immediately,  and  at  the  expense  of  the  costs. 
For  the  assignee  is  entitled  to  a  reasonable  time  to  wind 
up  his  trust,  and  if  the  creditors  speed  him  before  he  has 
had  that  time,  it  will  be  at  their  own  costs  and  charges. 

On  such  a  bill,  the  court  would  doubtless  direct  the  as- 
signee to  follow  the  rule  of  equity,  and  to  postpone  the 
private  debt  to  all  the  joint  debts. 

In  my  opinion  the  courts  have  gone  far  enough  in  sus- 
taining assignments,  without  proceeding  to  the  length  that 
they  will  sustain  one  so  framed  that  creditors  for  whose 
benefit  it  professes  to  be  made,  are  compelled  to  be  at  the 
expense  of  a  chancery  suit,  to  prevent  its  accomplishing 
gross  injustice,  and  violating  their  manifest  rights.  We  per- 
mit insolvent  debtors  to  make  assignments,  selecting  their 
own  trustees,  and  preferring  such  creditors  as  they  choose, 
so  that  one  may  receive  his  whole  debt,  while  another  equally 
meritorious,  but  less  favored,  loses  his  whole  claim.  Before 
resorting  to  this  nltimam  rationem,  debtors  are  allowed  to 
make  similar  preferences  by  actual  payment  in  money  or 
property,  to  such  as  they  choose.  We  go  still  farther.  While 
the  debtor  has  control  of  his  property,  he  may  take  $ioo 
in  his  hand,  and  say  to  the  creditor  for  $i,ooo,  take  this 
and  release  the  debt,  or  you  shall  receive  nothing.  I  will 
assign,  and  place  your  debt  in  the  last  class  which  is  to  be 
paid.     If  the  creditor  accepts  the  offer,  and  executes  a  re- 


77(>  FRAUD  ON  CREDITORS 

lease,  it  is  valid,  notwithstanding  the  moral  coercion  thus 
exercised  over  him. 

But  if  the  debtor,  instead  of  making  this  use  of  his 
property,  places  it  in  the  hands  of  trustees,  with  a  proviso 
that  it  shall  be  paid  only  to  such  of  his  creditors  as  will 
accept  it  and  release  their  debts,  the  law  no  longer  tolerates 
the  preference.    It  renders  the  whole  transfer  void. 

I  do  not  perceive  why  the  same  distinction  should  not 
prevail  in  reference  to  the  point  under  consideration.  Let 
the  partner  actually  apply  his  own  property  as  he  thinks 
proper,  while  he  administers  it  himself.  But  when  he  avails 
himself  of  the  lenient  provisions  of  our  law,  which  enable 
him  to  prefer  such  creditors  as  he  pleases,  on  making  an 
assignment,  and  to  select  his  own  trustee,  let  us  require  him 
to  avoid  violating  the  plainest  principles  of  equity.  Let 
us  prohibit  him  from  vesting  his  property  upon  a  trust  which 
this  court  frowns  upon  as  unrighteous,  and  which,  when 
invoked,  it  must  enjoin  from  being  executed. 

It  appears  to  me  that  an  assignment  which  attempts 
to  carry  out  through  trustees,  a  principle  which  this  court 
will  never  permit  any  fiduciary  to  carry  out,  is  a  fraud  upon 
the  court,  and  upon  the  law  which  tolerates  assignments. 
And  that  when  such  an  instrument  is  made  in  a  form  that 
will  inevitably  require  the  interposition  of  this  court  in  order 
to  prevent  gross  wrong  from  resulting,  and  such  a  wrong 
is  the  intended  consequence  of  its  provisions,  it  is  made 
in  fraud  of  the  law,  and  it  should  not  be  permitted  to  stand. 

A  party  executing  an  assignment  like  this,  does  what 
he  knows  is  not  honest  or  conscientious.  He  knows  that  no 
court  v/ill  sanction  his  directions,  and  that  if  invoked,  equity 
will  restrain  their  execution.  He  knows  also  that  without 
the  expensive  resort  by  his  creditors,  to  a  court  of  equity, 
his  inequitable  and  dishonest  designs  will  be  carried  into 
complete  effect.    Is  not  this  fraudulent  ? 

It  certainly  is,  in  my  judgment.  I  am  prepared  to  say 
with  Judge  Van  Ness  (Hyslop  v.  Clark,  14  Johns.  464), 
that  "an  insolvent  debtor  has  no  right  to  place  his  property 


JACKSON  V.  CORNELL  777 

in  such  a  situation  as  to  prevent  his  creditors  from  taking 
it,  under  the  process  of  a  court  of  law,  and  to  drive  them 
into  a  court  of  equity  where  they  must  encounter  great  ex- 
pense and  delay,  unless  it  be  under  very  special  circum- 
stances, and  for  the  purpose  of  honestly  giving  a  preference 
to  some  of  his  creditors,  or  to  cause  a  just  distribution  ^to 
be  made  among  them  all." 

What  I  have  said  of  an  assignment  by  co-partners,  pre- 
ferring their  several  private  debts,  is  equally  true  of  an 
assignment  by  one  partner  preferring  the  debts  of  the  co- 
partnership to  the  exclusion  of  his  own.  The  principle  of 
equity  is  equally  operative  in  the  one  case  as  in  the  other. 

If  the  preference  is  allowed  for  a  single  debt,  it  is 
equally  valid  for  all  debts.  So  that  a  co-partner  in  order  to 
enrich  his  associate,  if  an  assignment  like  this  is  to  be  up- 
held, may  assign  all  his  separate  property  to  such  associate, 
in  trust  to  pay  the  assignor's  half  of  the  debts  of  the  firm, 
and  after  those  are  paid,  to  apply  the  residue  to  his  private 
debts.  In  other  words,  he  may  turn  his  whole  private  prop- 
erty into  the  co-partnership,  by  means  of  one  of  these  trusts 
for  the  benefit  of  his  co-partner,  leaving  his  private  cred- 
itors penniless. 

When  the  firm  is  so  much  insolvent,  that  all  the  indi- 
vidual estate  of  the  insolvent  co-partner  will  merely  dis- 
charge his  portion  of  the  co-partnership  debts,  an  assignment 
made  by  him  giving  the  preference  to  the  latter,  is  a  direct 
gift  of  his  property  to  the  other  partner. 

Suppose,  in  this  case,  that  Farrington  and  Cornell  owed 
$5,000  more  than  their  joint  means,  and  that  the  deficiency 
on  Taylor's  mortgage  will  be  the  same  sum.  Cornell,  by 
preferring  that  deficiency  to  his  own  debts,  pays  out  of  his 
separate  property  the  whole  deficit  of  the  firm.  He  saves 
to  his  partner,  Farrington,  by  taking  it  from  his  own  cred- 
itors, $5,000,  which  F.,  if  solvent,  would,  according  to  the 
rule  of  equity,  have  to  pay  out  of  his  own  pocket.  This 
is  the  direct  and  legitimate  consequence  of  permitting  as- 
signments like  the  one  in  question.     How  the  partnership 


77S  FRAUD  ON  CREDITORS 

actually  stood,  the  case  does  not  disclose.  Cornell  was  then 
insolvent,  and  it  appears  that  eight  months  afterwards  Far- 
rington  was  in  doubtful  circumstances.  The  inference  is 
quite  strong  that  the  co-partnership  was  not  much  better 
off  than  Cornell  himself,  when  he  made  the  assignment.  At 
all  events,  the  joint  inference  from  these  facts  corroborates 
the  presumption  arising  from  the  assignment  itself,  that  it 
was  designed  to  benefit  Farrington,  in  respect  of  the  co- 
partnership debts,  to  the  prejudice  of  Cornell's  individual 
creditors.  And  I  have  no  hesitation  in  declaring  that,  in 
my  opinion,  the  assignment  was  for  this  cause,  void  as 
against  the  latter. 

Decreed  accordingly.^ 


-Compare:  Collomh  v.  CaJdurU,  16  N.  ¥.484,  1857.  (The  Caldwells, 
A  and  B,  were  partners.  They  held  certain  property  as  tenants  in 
common.  Being  insolvent,  both  individually  and  collectively,  they  as- 
signed their  partnership  property  and  the  property  held  in  common  for 
the  benefit  of  the  firm  creditors,  and  provided  that  if  any  surplus 
remained  it  should  be  returned  to  them.  C,  a  separate  creditor  of  B, 
secured  a  judgment,  and  then  instituted  proceedings  to  set  aside  the 
assignment.  Comstock,  J. :  "The  Caldwells  being  insolvent,  assigned 
the  estate,  which  they  owned  together,  to  pay  the  debts  which  they 
jointly  owed,  but  one  of  them  also  owed  debts  individually,  which  were 
entitled  to  be  paid  out  of  the  residue  of  his  share  in  the  fund  assigned. 
Instead  of  making  provision  for  paying  these  individual  debts,  the  whole 
fund  was  tied  up  under  a  trust,  and  after  the  particular  trusts  should  be 
satisfied  the  residue  was  reserved  to  the  assignors.  It  is  true,  this 
reservation  might  not  vitiate  the  assignment,  if  the  fund  to  which  it 
attached  had  consisted  of  partnership  property  only.  The  rights  of  a 
creditor  of  one  partner  are  subjected  to  an  equitable  adjustment  of 
accounts  between  the  partners  themselves,  and  therefore  it  may  not  be 
fraudulent  to  provide,  in  an  insolvent  partnership  assignment,  that  the 
surplus  of  the  effects  shall  be  returned  to  the  firm  instead  of  being  di- 
rected to  the  payment  of  the  private  debts  of  either  of  the  members. 
But  the  real  estate  assigned  by  the  Caldwells,  as  we  understand  the  case, 
was  held  by  them  as  tenants  in  common.  The  interest  of  each  was  there- 
fore his  individual  propert}',  as  much  so  as  his  separate  estate.  Thus 
they  had  no  right  to  convey  in  trust  with  a  reservation  in  their  own 
favor,  leaving  their  individual  creditors  unprovided  for."  Pages  486-7. 
Assignment  set  aside.) 

Gadsden  v.  Carson,  9  Rich.  Eq.  (S.  C.)  252,  1857  (One  Carson,  being 
a  member  of  a  firm,  and  insolvent,  assigned  certain  of  his  individual 
property  in  trust  to  pay  firm  creditors.  Dargan,  Ch. :  "This  misap- 
propriation by  the  defendant,  Carson,  of  his  private  assets,  to  the  pay- 
ment of  his  copartnership  debts,  to  the  postponement,  and  practically  to 
the  entire  exclusion  of  his  individual  debts,  is  in  violation  of  the  equitable 
rights  of  the  plaintiff,  who  is  a  large  separate  creditor.  To  this  extent, 
if  no  further,  he  would  be  entitled  to  relief."    Page  257.") 

Smith  V.  Hoivard,  20  How.  Pr.  121,  1859.  (A  and  B  were  partners. 
Their  individual  debts  and  assets  were  unequal.    Reciting  that  they  were 


JACKSON  V.  CORNELL  779 

unable  to  pay  their  debts  punctually,  or  in  full,  they  made  a  general 
assignment  of  all  their  partnership  and  individual  property  to  pay,  first, 
firm  creditors,  and  second,  to  pay  their  separate  creditors  pro  rata. 
Held,  that  this  showed  an  intention  to  apply  the  individual  property  of 
one  partner  to  the  payment  of  the  separate  creditors  of  the  other  part- 
ner;  that  this  was  a  fraud  which  invalidated  the  whole  assignment,  and 
that  therefore  the  assignment  could  be  set  aside  at  the  instance  of  a 
certain  class  of  firjn  creditors.) 

Gallagher's  App.,  114  Pa.  353,  1886.  (A,  being  a  member  of  a  fiun, 
the  day  before  an  assignment  for  the  benefit  of  creditors,  and  probably  in 
anticipation  of  the  assignment,  confessed  judgments  in  favor  of  certain 
firm  creditors.  Individual  creditors  asked  to  have  the  judgments  post- 
poned to  individual  debts.  Request  denied.  Paxson,  J. :  "Jackson  v. 
Cornell,  Sandford's  ist  Chan.  Rep.,  348,  was  cited  by  appellants  as 
sustaining  the  position  that  the  assignor  could  not,  by  confession  of 
judgment,  prefer  partnership  creditors  as  against  his  individual  estate. 
We  do  not  regard  it  as  authority  upon  the  point  referred  to.  The 
question  there  arose  upon  the  validity  of  such  a  preference  in  the  deed 
of  assignment  itself,  a  thing  which  would  be  wholly  invalid  by  our  law. 
And  that  case  recognized  the  principle  contended  for  by  the  appellees 
here,  for  the  Court  said :  'Let  the  partner  actually  apply  his  own  prop- 
erty as  he  thinks  proper  while  he  administers  it  himself.'  That  is  pre- 
cisely what  the  assignor  did  in  the  case  at  bar.  Whilst  having  full 
dominion  over  his  property  he  confessed  these  judgments.  To  the  ex- 
tent of  giving  liens  on  his  real  estate  he  applied  it  to  the  payment  of 
certain  debts.  The  assignee  took  the  real  estate  bound  by  the  judgments 
and  subject  to  their  lien.  It  is  too  plain  for  argument  that  the  proceeds 
must  be  applied  to  their,  payment.  This  disposes  of  the  only  point  in 
the  case."     Page  357.) 

See  also  Purdy  v.  Lacock,  6  Pa.  490,  1847  (A  and  B  were  partners. 
B  confessed  a  judgment  in  favor  of  A  to  secure  a  lien  for  the  capital  A 
had  put  into  tlie  firm.  C.  a  separate  creditor  of  B,  secured  a  judgment 
against  B.  Held,  on  a  feigned  issue,  that  the  lien  of  A's  judgment  was 
ahead  of  the  lien  of  B's  judgment.) 

Thompson's  App.,  3  Walk.  (Pa.)  345,  1883.  (B  and  C  were  part- 
ners. B  confessed  judgment  to  B  and  C  for  money  advanced  for  him 
by  the  firm.  A  subsequently  obtained  a  judgment  against  B.  Held,  that 
B  had  a  right  to  admit  his  liabilities  to  the  firm,  waive  technicalities, 
and  by  confessing  judgment  create  a  lien  in  favor  of  his  firm  on  his 
individual  real  estate,  and  that  therefore  the  lien  of  the  firm's  judgment 
was  ahead  of  the  lien  of  A's  judgment.) 


NAYLOR  V.  BROWN  781 


SECTION    3.— FRAUD    ON    THE    CREDITORS    OF 
A  CORPORATION. 


NAYLOR  V.  BROWN. 

In  the  High  Court  of  Chancery,  Before  Lord  Not- 
tingham, 1673. 

Finch's  Reports,  rc. 

The  plaintiff  Naylor  having  lent  the  Company  of  Wood- 
mongers  £500  they  gave  him  a  bond  of  the  penalty  of 
£1000  under  their  common  seal,  conditioned  for  the  pay- 
ment of  £500  and  interest,  and  the  said  company  assigned 
another  bond  of  £1000  due  to  them,  and  this  was  to  Sir 
William  Wild  for  the  payment  of  some  of  their  debts,  and 
Sir  William  declared  the  trust  as  to  £620.  Parcel  thereof 
for  Sir  Edmund-Bury  Godfrey,  and  for  twelve  others  therein 
named,  and  the  rest  for  several  members  of  the  company. 

Afterwards  a  Quo  Warranto  was  brought  against  this 
company,  and  they  were  dissolved,  having  forfeited  their 
charter,  and  then  they  parted  stakes  amongst  themselves, 
and  some  few  others  carving  large  shares  out  of  their  whole 
estate  to  some  of  their  own  members,  who  pretended  great 
debts  due  to  them;  and  left  the  plaintiff  Naylor's  debt,  and 
some  other  creditors,  who  were  not  plaintiff's  unsatisfied. 

The  Court  upon  hearing  this  cause  did  not  approve 
these  preceedings  of  the  company  towards  their  creditors, 
especially  towards  such  who  were  not  members  of  the  com- 
pany, with  whom  they  dealt,  as  bankrupts  usually  do,  who 
knowing  they  shall  break,  pay  such  friends  as  they  like  best. 

And  it  appearing  that  the  company  had  borrowed  more 
of  strangers  than  the  said  £1000  would  reimburse,  (of  which 
the  plaintiff  Naylor's  debt  of  £5000  was  part)  the  distribution 


782         FRAUD   ON   CREDITORS   OF  CORPORATION 

of  that  sum  amongst  particular  members  of  the  company  was 
injurious  to  such  creditors  who  were  not  members  thereof; 
it  being  more  reasonable,  that  of  losses  must  fall  upon  the 
creditors,  such  losses  should  be  borne  by  those  who  were 
members  of  the  company,  who  best  knew  their  estates  and 
credit,  and  not  by  strangers  who  were  drawn  in  to  trust  the 
company  upon  the  credit  and  countenance  it  had  from  such 
particular  members ;  and  which  in  this  case  was  more  re- 
markable, because  several  of  the  principal  members  of  the 
company  had  set  their  names  to  the  plaintiff's  bond  of  £500 
under  the  common  seal,  which  though  it  did  not  legally  bind 
them  in  their  private  capacities,  yet  it  was  certainly  an  in- 
ducement to  the  plaintiffs  to  lend  their  money. 

The  Court  was  of  opinion  that  the  declaration  of  the 
trust  bySir  Wm.  Wild  was  utterly  void  as  to  the  said  £620 
for  that  the  corporation  did  not  join  therein,  nor  give  him 
any  authority  under  their  common  seal,  or  by  any  corporate 
act  to  make  such  a  declaration. 

And  therefore  decreed  that  the  defendant  Sir  Ed.  Bury- 
Godfrey  and  the  other  defendants  members  of  the  said  com- 
pany, who  have  received  any  part  of  the  said  £620  by  virtue 
of  such  declaration  of  trust,  do  pay  back  the  same  with  in- 
terest; it  being  in  equity  still,  a  part  of  the  estate  of  the  late 
company,  and  that  for  this  purpose  they  come  to  an  account 
before  a  master,  and  that  the  plaintiff's  debts  be  first  paid  to- 
gether with  damages  and  costs,  so  far  as  the  estate  of  the  late 
company  will  extend,  and  that  if  that  estate  shall  not  be  suffi- 
cient, then  the  debts  are  to  be  paid  in  proportion,  etc. 


WOOD  t.     DUAIMER  783 


WOOD  V.  DUMMER. 

In  the  Circuit  Court  of  the  United  States  for  the 
District  of  Maine,  1824. 

3  Mason's  Reports,  308. 

Bill  in  equity  brought  by  the  plaintiffs,  as  holders  of  the 
bank  notes  of  the  Hallowell  and  Augusta  bank,  against  the 
defendants,  as  stockholders  in  the  same  bank,  for  payment 
of  the  same  notes  upon  the  ground  of  an  asserted  fraudu- 
lent division  of  the  capital  stock  of  the  bank  by  the  stock- 
holders. The  defendants  put  in  answers,  denying  the  fraud, 
but  admitting  the  division  of  the  capital  stock,  &c. ;  and  de- 
nying the  plaintiffs'  title  to  relief.  The  general  replication 
was  filed,  and  the  cause  was  set  down  for  a  hearing  upon 
the  whole  merits,  at  the  last  October  term  of  the  Court,  upon 
certain  admissions  of  the  parties,  and  was  argued  by  Alden 
and  Whitman  for  the  plaintiffs,  and  by  Bond  and  Longfel- 
low for  the  defendants.  And  at  this  term  the  opinion  of 
the  Court  was  delivered  in  substance  at  follows : 

Story,  /.  The  Hallowell  and  Augusta  bank  was  incor- 
proated  in  March  1804,  by  the  Legislature  of  Massachusetts, 
with  a  capital  stock  of  $200,000,  divided  into  shares  of  $100 
each,  for  a  term  which  expired  on  the  first  Monday  of  Oc- 
tober 181 2,  with  the  usual  rights  and  privileges  belonging 
to  the  banks  in  the  same  state.  In  June  18 12,  the  Legisla- 
ture passed  an  act  [act  of  1812,  ch.  57]  continuing  all  the 
banks,  whose  charters  would  expire  on  the  first  Monday 
of  October  181 2,  as  corporate  bodies  until  the  first  Monday 
of  October  1816,  "for  the  sole  purpose  of  enabling  said 
banks  gradually  to  settle  and  close  their  concerns,  and  divide 
their  capital  stock."  And  by  a  further  act,  passed  in  Decem- 
ber 1816  (act  of  1816,  ch.  no),  the  term  was  prolonged 
for  three  years  from  the  passing  of  this  last  act.  In  January 
181 3,  at  a  meeting  of  the  stockholders  of  the  Hallozvdl  and 


784         FRAUD   ON   CREDITORS  OF  CORPORATION 

Augusta  bank,  a  vote  was  passed,  ordering  a  dividend  to  be 
made  among  the  stockholders  of  the  bank  of  fifty  per  cent. 
of  the  capital  stock  thereof ;  and  in  October  in  the  same  year, 
a  vote  was  passed  for  a  further  dividend  of  twenty-five  per 
cent,  of  the  capital  stock,  making  in  the  whole  a  dividend  of 
seventy-five  per  cent,  of  the  whole  capital  stock  among  the 
stockholders.  The  notes  of  the  bank  continued  to  circulate 
in  good  credit  until  after  November  1814;  and  the  plaintiffs 
were,  in  October  and  November  181 4,  owners  in  their  sev- 
eral rights  of  notes  of  the  same  bank  to  a  sum  in  the  aggre- 
gate amounting  to  more  than  $29,000,  which  were  presented 
for  payment  to  the  bank,  and  payment  refused.  The  plain- 
tiffs received  certain  notes  of  the  directors  as  collateral  se- 
curity, but  these  were  never  paid.  In  fact  one  quarter  part 
of  the  capital  stock  of  the  bank  had  never  been  paid  in,  but 
was  secured  by  the  notes  of  the  stockholders,  called  stock 
notes;  and  about  $90,000  of  debts  (beside  stock  notes)  were 
due  from  certain  directors  of  the  bank,  who  became  insolvent 
and  utterly  unable  to  pay  the  same.  So  that  nearly  three- 
quarters  of  the  stock  was  lost  or  unpaid,  either  from  insolv- 
ency or  some  other  cause,  and  left  the  bank  involved,  after 
the  division  of  its  stock,  in  deep  insolvency.  In  June  1812, 
another  and  new  bank  was  incorporated,  composed  in  part  of 
the  same  persons,  with  the  same  corporate  name.  The  new 
bank,  for  a  considerable  time,  continued  to  give  credit  to, 
and  circulate  the  notes  of  the  old  bank ;  and  the  bill  asserted 
the  new  bank  to  have  become  possessed  of  the  funds  of  the 
old  bank  to  a  very  large  amount. 

Such  are  the  principal  facts;  and  the  claim  of  the  plain- 
tiffs is  to  be  reimbursed  by  the  defendants,  (who  are  owners 
of  three  hundred  and  twenty  shares)  out  of  the  dividends  of 
the  capital  stock  received  by  them,  the  amount  of  the  debts 
so  due  to  the  plaintiffs  respectively,  for  the  bank  notes  above 
stated. 

The  case  is  full  of  difficulties.  The  bill  is  drawn  in  a 
very  loose  and  inartificial  manner.     It  proceeds  principally 


WOOD   V.   DU^niER  785 

upon  the  grounds  of  a  gross  over  issue  of  bank  notes,  and 
other  violations  of  the  charter,  and  of  a  fraudulent  dividend 
by  the  stockholders  with  a  knowledge  of  their  insolvency ; 
grounds  which  are  denied  by  the  answers,  and  are  not  in  the 
slightest  degree  established  in  the  proofs.  It  does  not  directly 
proceed  upon  the  ground,  that  the  defendants  hold  a  trust 
fund  applicable  to  the  payment  of  the  debts  of  the  corpora- 
tion ;  but  leaves  tliis  to  be  picked  up  in  fragments  by  a  min- 
ute analysis  of  the  bill.  I  pass,  however,  over  these  objec- 
tions, for  the  purpose  of  considering  that,  which  is  the  prin- 
cipal point  argued  in  the  cause,  whether  the  capital  stock  in 
the  hands  of  the  stockholders  is  liable  to  the  payment  of  the 
debts  of  the  bank. 

It  appears  to  me  very  clear  upon  general  principles,  as 
well  as  the  legislative  intention,  that  the  capital  stock  of 
banks  is  to  be  deemed  a  pledge  or  trust  fund  for  the  pay- 
ment of  the  debts  contracted  by  the  bank.  The  public,  as 
well  as  the  legislature,  have  always  supposed  this  to  be  a 
fund  appropriated  for  such  purpose.  The  individual  stock- 
holders are  not  liable  for  the  debts  of  the  bank  in  their  pri- 
vate capacities.  The  charter  relieves  them  from  personal 
responsibility,  and  substitutes  the  capital  stock  in  its  stead. 
Credit  is  universally  given  to  this  fund  by  the  public,  as  the 
only  means  of  repayment.  During  the  existence  of  the  cor- 
poration it  is  the  sole  property  of  the  corporation,  and  can 
be  applied  only  according  to  its  charter,  that  is,  as  a  fund 
for  payment  of  its  debts,  upon  the  security  of  which  it  may 
discount  and  circulate  notes.  Why,  othei'A\nse,  is  any  capital 
stock  required  by  our  charters?  If  the  stock  may,  the  next 
day  after  it  is  paid  in,  be  withdrawn  by  the  stockholders 
without  payment  of  the  debts  of  the  corporation,  why  is  its 
amount  so  studiously  provided  for,  and  its  payment  by  the 
stockholders  so  diligently  required?  To  me  this  point  ap- 
pears so  plain  upon  principles  of  law.  as  well  as  common 
sense,  that  I  cannot  be  brought  into  any  doubt,  that  ihe 
charters  of  our  banks  make  the  capital  stock  a  trust   fund 


786         FRAUD   ON   CREDITORS  OF  CORPORATION 

for  the  payment  of  all  the  debts  of  the  corporation.  The 
bill-holders  and  other  creditors  have  the  first  claims  upon 
it;  and  the  stockholders  have  no  rights,  until  all  the  other 
creditors  are  satisfied.  They  have  the  full  benefit  of  all  the 
profits  made  by  the  establishment,  and  cannot  take  any  por- 
tion of  the  fund,  until  all  the  other  claims  on  it  are  extin- 
guished. Their  rights  are  not  to  the  capital  stock,  but  to  the 
residuum  after  all  demands  on  it  are  paid.  On  a  dissolution 
of  the  corporation,  the  bill-holders  and  the  stockholders  have 
each  equitable  claims,  but  those  of  the  bill-holders  possess, 
as  I  conceive,  a  prior  exclusive  equity.  The  same  doctrine 
has  been  recognized  by  the  Supreme  Court  of  Massachusetts, 
in  Vose  v.  Grant  (15  Mass.  R.  505,  517,  522),  and  Spear  v. 
Grant  (16  Mass.  R.  9,  15). 

If  I  am  right  in  this  position,  the  principal  difficulty  in 
the  cause  is  overcome.  If  the  capital  stock  is  a  trust  fund, 
then  it  may  be  followed  by  the  creditors  into  the  hands  of 
any  persons,  having  notice  of  the  trust  attaching  to  it.  As 
to  the  stockholders  themselves,  there  can  be  no  pretence  to 
say,  that,  both  in  law  and  fact,  they  are  not  affected  with  the 
most  ample  notice. 

The  doctrine  of  following  trust  funds  into  the  hands  of 
any  persons,  who  are  not  innocent  purchasers,  or  do  not 
otherwise  possess  superior  equities,  has  been  long  estab- 
lished. Lord  Redcsdale,  in  Adair  v.  Shaw  (i  Sch.  &  Lef. 
243,  262),  lays  it  down  in  very  broad  terms.  He  says,  "if 
we  advert  to  the  cases  on  this  subject,  we  shall  find,  that 
trusts  are  enforced  not  only  against  those  persons,  who  right- 
fully are  possessed  of  the  trust  property,  as  trustees,  but  also 
against  all  persons,  who  come  into  possession  of  the  property 
bound  by  the  trust  with  notice  of  the  trust;  and  whoever 
comes  so  into  possession,  is  considered  as  bound  with  respect 
to  that  special  property  to  the  execution  of  the  trust."  And 
a  very  strong  recognition,  as  well  as  application  of  the  prin- 
ciple, will  be  found  in  Taylor  v.  Plmncr  (3  Maule  &  Selw, 
562,  574,)  even  in  a  court  of  common  law.  Upon  this  ground. 


WOOD  V.   DUMMER  787 

assets  disposed  of  by  executors  by  misapplication,  or  existing 
in  the  hands  of  debtors,  where  the  executor  is  insolvent,  or 
there  is  collusion,  are  often  reached  in  favor  of  creditors,  as 
a  trust  fund.  Hill  v.  Simpson  (7  Vez.  162),  and  the  cases 
there  cited  fully  illustrate  this  position.  The  cases  of  part- 
nership furnish  also  a  pretty  strong  analog}-.  There,  "in 
equity,  partnership  funds  will  be  followed  in  favor  of  cred- 
itors into  the  hands  of  third  persons.  It  is  true,  that,  as  the 
master  of  the  rolls  said  in  Campbell  v.  Mulleft  (2  Swanston 
R-  55C>'  575)'  ^^^^  equities  of  creditors  are  to  be  worked  out 
through  the  medium  of  the  partners.  They  have  no  lien, 
but  something  approaching  to  a  lien,  which  courts  of  equity 
will  regard  and  enforce,  in  all  cases,  where  superior  rights, 
which  ought  to  be  protected,  do  not  intervene.  It  is  not, 
however,  necessary  to  search  for  analogous  cases ;  for  upon 
the  plain  import  of  the  charter,  the  capital  stock  is  a  trust 
fund  for  creditors,  and  the  stockholders,  upon  the  division, 
take  it  subject  to  all  equities  attached  to  it.  They  are,  to  all 
intents  and  purposes,  privies  to  the  trust,  and  receive  it  cum 
oncre.  *  *  *i 

The  next  question  is,  what  sort  of  decree  the  plaintiffs 
are  entitled  to.  Are  they  entitled  to  a  decree,  to  the  full 
amount  of  the  dividends  received  by  the  defendants  re- 
spectively, towards  payment  of  the  debts  due  from  the  bank 
to  them,  or  are  they  entitled  only  to  a  pro  rata  payment  out 
of  that  dividend,  in  the  proportion,  which  the  stock,  held  by 
the  defendants,  bears  to  the  whole  capital  stock? 

The  bill  does  not  allege,  that  the  other  stockholders,  who 
have  received  dividends,  are  insolvent,  or  not  of  the  jurisdic- 
tion of  the  Court.  Nor  does  it  state  what  the  amount  of  the 
debts  due  from  the  bank  to  bill-holders,  or  others,  is.  It 
would  have  been  desirable,  as  far  as  it  was  practicable,  that 
all  the  other  creditors,  who  had  a  common  interest,  might 


'  The  Court's  discussion  of  questions  of  equity  practice  are  omitted. 
Judge  Story  decided,  that  as  it  was  impossible  to  make  all  the  credi- 
tors and  all  the  stockholders  parties,  the  bill  could  be  maintained  by 
some  of  the  creditors  against  some  of  the  stockholders. 


788         FRAUD  ON   CREDITORS  OF  CORPORATION 

have  been  brought  before  the  Court.  But  neither  party  has 
urged  it,  or  waived  any  formal  objection  to  the  introduction 
of  them.  The  Court,  therefore,  in  proceeding  to  do  equity 
to  those  before  it,  must  take  care,  that  it  is  not  the  instru- 
ment of  injustice  to  others,  who  are  not  represented.  Non 
constat,  if  the  whole  fund  is  taken  from  the  defendants  in 
favor  of  the  plaintiffs,  that  there  will  remain  any  solvent 
stockholders,  from  whom  the  other  creditors  can  claim  any 
share.  It  is  true,  in  the  case  of  the  City  of  London  v.  Rich- 
mond (2  Vern.  421 ;  i  Bro.  Par.  Cas.  518),  that,  though  all 
the  parties  in  interest  were  not  before  the  Court,  the  full  rent 
was  decreed.  But  that  case  furnishes  no  rule  for  the  present, 
for  there  the  trustees  of  all  the  share-holders  were  before 
the  Court,  and  they  were  the  assignees  of  the  estate,  and 
therefore  held  it  liable  to  the  rent.  In  the  anonymous  case 
in  2  Eq.  Ca.  Abr.  166,  pi.  7,  the  decree  was  only  for  a  pro- 
portion of  the  money  expended.  But,  there,  the  bill  asked 
for  no  more.  I  rather  incline  to  think,  that  the  judges  in  the 
cases  in  15  Mass.  R.  505,  &  16  Mass.  R.  9,  meant  to  indicate 
an  opinion  in  favor  of  the  bill-holders  only  for  a  proportion, 
unless  special  circumstances  were  made  out,  such  as  insolv- 
ency, &c. 

What  would  be  the  effect  of  the  introduction  of  an  aver- 
ment of  the  insolvency  of  the  other  stockholders,  or  their 
being  out  of  the  jurisdiction,  or  of  other  circumstances  de- 
noting a  peculiar  equity,  in  a  bill  of  this  nature,  it  is  not  now 
necessary  to  decide.  Taking  into  consideration  the  manifest 
defects  of  the  present  bill,  the  long  delay  in  instituting  the 
present  suit  (which  is  not  accounted  for  in  any  averments 
framed  for  this  pupose),  the  possible,  nay,  probable  interme- 
diate insolvencies  of  some  of  the  stockholders,  the  injustice, 
which  may  arise  to  other  creditors  of  the  bank,  not  before 
the  Court,  by  any  other  course,  I  have  come  to  the  conclusion, 
that  our  duty  is  best  performed  by  holding  the  plaintiffs  en- 
titled to  a  decree,  that  the  defendants  pay  out  of  the  divi- 
dends of  the  capital  stock  received  by  them,  so  much  of  the 


WOOD  V.   DUMAIER  789 

debts  due  to  the  plaintiffs,  as  the  number  of  shares  held  by 
them  in  the  same  capital  stock  (viz.  320  shares)  bears  to  the 
whole  number  of  shares  in  the  capital  stock  (viz.  2000 
shares). 

There  is  much  force  in  the  suggestion,  that  the  corpora- 
tion books  have  been  withdrawn  and  secreted,  so  that  the 
plaintiffs  were  unable  originally  to  ascertain  who  the  other 
stockholders  were.  But  this  difficulty  might,  in  som.e  meas- 
ure, have  been  overcome  by  apt  averments  in  the  bill ;  and 
the  disclosure  of  the  names  of  several  stockholders  in  the 
answers  puts  the  plaintiffs  in  possession  of  facts,  by  which, 
at  their  choice,  they  might  by  an  amendment  have  brought 
those  persons  before  the  Court,  or  have  assigned  a  sufficient 
reason  for  the  omission. 

My  judgment  accordingly  is,  that  the  defendants  are  to 
pay  the  plaintiffs,  in  the  proportion  already  intimated,  and 
no  further. 

Decree  accordingly  with  costs. - 


^Compare:  Bartlett  v.  Drew,  57  N.  Y.  587,  1874.  (The  B  Co. 
was  a  New  Jersey  corporation.  C  was  a  large  stockholder  and  presi- 
dent of  the  board  of  trustees.  The  Company  sold  certain  boats  owned 
by  it,  and  distributed  the  proceeds  among  its  stockholders,  C  receiving 
his  share.  A  recovered  a  judgment  against  the  Company  and  issued 
execution  which  was  returned  nulla  bona.  A  brought  an  action  in  the 
nature  of  a  creditor's  bill  against  C  to  reach  C's  share  in  the  proceeds 
of  the  sale  of  the  boat,  which  share  was  much  larger  than  the  amount 
of  A's  Judgment.  Decree  that  C  be  required  to  pay  A's  Judgment 
affirmed,  the  Court  being  of  the  opinion  that  as  this  was  not  a  bill 
to  w^ind  up  the  Company  it  was  unnecessary  for  C  to  make  the  other 
creditors  parties  plaintiff;  that  this  was  merely  a  proceeding  to  reach, 
in  equity  the  property  of  a  debtor,  and,  therefore,  that  C  had  nothing  to 
do  with  the  equities  between  the  stockholders,  but  could  collect  his 
whole  debt  from  C). 

Osgood  V.  Laytin,  3  Keye's  [N.  Y.],  521,  1867.  (A  statute  pro- 
vided that  the  receiver  of  an  insolvent  corporation  might,  for  the 
benefit  of  creditors,  treat  as  void,  and  resist  all  acts  done  in  fraud  of 
the  rights  of  any  creditor.  A  was  appointed  receiver  of  a  corporation. 
He  brought  a  bill  in  equity  against  the  stockholders,  alleging  that  they 
had  been  paid  a  dividend  when  the  Company  was  insolvent,  and  de- 
manding a  decree  against  the  stockholders  severally  for  the  amounts 
they  had  received.  The  defendant's  demurrer  was  overruled.  The 
Court  w-as  of  opinion  that  no  action  would  lie  at  common  law  against 
a  stockholder  by  any  one  creditor.  Such  action,  however,  can  be  given 
by  statute.  For  a  case  in  which  a  Judgment  creditor  of  a  company 
brought,  under  a  statute,  a  suit  against  a  stockholder  for  the  amount 
of  the  dividend  he  had  been  paid  when  the  company  was  insolvent, 
see  American  Steel  &  Wire  Co.  v.  Eddy,  89  N.  W.  952  [Mich.],  1902). 


790         FRAUD   ON   CREDITORS  OF  CORPORATION 


CATLIN  V.  THE  EAGLE  BANK. 
In  the  Supreme  Court  of  Errors  of  Connecticut,  1826. 

6   Connecticut   Reports,   233. 

This  was  a  bill  in  chanceiy. 

The  Eagle  Bank  is  a  corporation,  established  by  an  act 
of  the  legislature,  in  October,  181 1,  for  banking  purposes, 
with  the  usual  powers  of  such  an  institution ;  the  charter  be- 
ing, at  all  times,  subject  to  alteration,  amendment  or  revoca- 
tion by  the  General  Assembly.  The  plaintiff  is  a  creditor 
of  this  corporation  to  the  amount  of  between  90,000  and 
100,000  dollars.  The  bank,  on  the  15th  September,  1825, 
failed,  and  was  in  fact  insolvent.  Among  its  creditors  was 
The  Saz'iiigs  Bank  of  Nezv  Haven,  a  corporation  empowered 
to  receive  deposits  from  individuals,  for  safe-keeping  and 
management,  and  obliged  to  pay  the  depositors  the  interest 
or  profits  that  should  accrue.  This  institution  had  deposited 
with  the  Eagle  Bank,  at  an  interest  of  four  per  cent.,  and  to 
be  returned  on  demand,  all  the  money  which  it  had  received, 
in  small  sums,  from  a  great  multitude  of  depositors,  amount- 
ing to  between  80,000  and  go, 000  dollars.  In  payment  and 
security  of  this  demand,  the  directors  of  the  Eagle  Bank, 
after  its  actual  insolvency,  mortgaged  to  the  Savings  Bank 
real  estate  worth  about  20,000  dollars  paid  to  Samuel  J. 
Hitchcock,  Esq.,  secretary  of  the  Savings  Bank,  about  15,000 
in  money,  and  assigned  to  him  sundry  negotiable  promissory 
notes,  to  the  amount  of  about  52,000  dollars.  The  bill 
prayed  that  these  conveyances  might  be  set  aside,  and  that  all 
the  funds  of  the  Eagle  Bank,  at  the  time  of  its  failure,  might 
be  equitably  distributed  among  its  creditors,  in  proportion  to 
to  their  respective  claims. 

The  case  was  reserved  for  the  advice  of  this  Court.  ^ 

Hosmer,  Ch.  J.    It  is  an  undoubted  principle,  that  the 


^The  Reporter's  notes  of  the  arguments  of  Counsel  arc  omitted. 


CATLIN  V.  THE  EAGLE  BANK  791 

powers  of  a  corporation  are  solely  derived  from  its  char- 
ter, which  is  the  law  of  its  nature ;  and  that  it  is  invested 
witli  such  powers  only  as  are  expressly  delegated,  or  which 
are  necessar)',  to  carry  the  express  delegations  into  effect. 
The  Nezv  York  Firemen  Insurance  Company  v.  Ely  &  al.  5 
Co7m.  Rep.  560.  By  the  act  of  incorporation,  the  Eagle 
Bank  had  authority  to  purchase,  hold  and  convey  property, 
with  the  usual  banking  powers  superadded ;  and  the  direct- 
ors of  the  bank  were  authorized  to  dispose  of  and  manage 
its  monies,  credits  and  property,  and  to  regulate  its  con- 
cerns, in  all  cases,  not  specially  provided  for.  To  this  gen- 
eral grant,  in  relation  to  the  rights,  privileges  and  duration 
of  the  bank,  there  is  neither  exception  nor  limitation,  save 
that  the  charter  is  alterable,  amendable,  and  revocable,  at 
the  pleasure  of  the  legislature.  It  results,  undeniably,  that 
the  rights,  powers  and  duties  of  the  bank,  so  far  as  they 
depend  on  the  act  of  incorporation,  remain  unchanged,  until 
it  is  revoked,  and  independent  of  its  actual  solvency  or  in- 
solvency. The  general  laws  of  the  land,  or  the  principles 
which  guide  this  Court,  as  a  court  of  chancery,  may  make  a 
difference  on  this  subject ;  but  setting  aside  these  considera- 
tions, and  admitting  the  operation  of  the  charter  exclu- 
sively, the  bank  is  authorized  to  exercise  the  same  powers, 
at  all  times,  without  reference  to  its  condition. 

Whether  the  directors  of  the  corporation,  after  it  has 
become  actually  insolvent,  can  make  payment  or  give  secur- 
ity to  one  of  its  creditors,  and  leave  another  unpaid  and 
without  security,  is  the  general  question  to  be  determined. 
It  has  been  contended,  in  behalf  of  the  plaintifY,  with  no 
inconsiderable  ingenuity,  that  the  legislature  intended  to 
render  the  corporation  at  all  times  a  trustee  for  the  creditors. 
This  suggestion  is  too  unfounded,  and  too  destitute  of  prac- 
tical importance,  to  be  admitted  or  discussed.  Such  a  prin- 
ciple, during  the  solvency  of  the  bank,  must  be  dormant  and 
useless ;  and  neither  the  charter,  nor  the  nature  of  the  case, 
furnishes  any  warrant  for  the  supposition. 


792         FRAUD   ON   CREDITORS   OF  CORPORATION 

If  the  corporation,  so  far  as  regards  its  right  to  man- 
age and  dispose  of  its  property,  has  power  analogous  with 
that  which  is  vested  in  an  individual,  the  plaintiff's  bill  is 
wholly  destitute  of  merits.  An  individual  debtor,  who  is 
actually  insolvent,  may  prefer  one  creditor  to  another,  un- 
less in  certain  cases  under  the  bankrupt  laws ;  and  to  do  this, 
as  was  said  by  Lord  Kenyan,  is  neither  illegal  nor  immoral. 
We  have  no  bankrupt  system,  to  control  the  acts  of  the  in- 
solvent merchant;  and  in  the  absence  of  all  legal  liens,  he 
may  prefer  a  creditor,  if  the  act  is  done  in  good  faith.  To 
discuss  the  reasons  of  the  rule  is  unnecessaiT-  It  is  suf- 
ficient to  say  to  those,  who  are  not  disposed  to  unsettle 
foundations,  that  it  is  firmly  and  uniformly  established,  both 
at  law  and  in  chancery.  Estzvick  v.  Cailland,  5  Term  Rep. 
420.  Nnnn  v.  Wilsmore,  8  Term  Rep.  521.  Hopkins  v. 
Gray,  7  Mod.  Rep.  139.  Meiix  &  al.  v.  Hozvell  &  al.,  4  East 
I.  McMenomy  &  al.  v.  Ferrers,  3  Johns.  Rep.  84.  Willes 
&  al.  V.  Ferris,  5  Johns.  Rep.  344.  Small  v.  Oiidley,  2  P. 
Wms.  427.  Cock  V.  Goodfellozv,  10  Mod.  Rep.  489. 
Phoenix  v.  Assignees  of  Ingraham,  5  Johns.  Rep.  412,  426, 
427.  liendrick  v.  Robinson,  2  Johns.  Ch.  Rep.  283.  The 
same  rule  is  equally  applicable  to  partners;  and  what  is  a 
banking  corporation,  in  the  essence,  but  a  partnership  au- 
thorized by  a  special  act  of  the  legislature?  Gozv  on  Part. 
234.  It  is  an  artificial  person;  and  this  denomination  is 
given  to  it,  by  reason  of  its  resemblance  to  a  natural  per- 
son, in  respect  to  its  powers,  rights  and  legal  duties.  It  is 
difficult  for  me  to  conceive,  where  no  restraint  is  inter- 
posed, in  a  charter  of  incorporation,  on  what  ground  the 
general  authority  delegated  is  subjected  to  exceptions,  or 
fettered  by  restrictions,  from  which  an  individual  and  a 
mercantile  company  are  free.  And  this  difficulty  is  much 
increased,  as  no  case  intimating  this  diversity  between  cor- 
porations and  individuals,  has  been  cited,  nor  can  be  found, 
by  my  utmost  researches.  Where  no  legal  lien  has  been 
obtained,   it  is  a  reasonable   supposition,   that  the  relation 


CATLIN  V.  THE  EAGLE  BANK  792> 

of  creditor  and  debtor,  must,  in  all  cases,  infer  the  same  con- 
sequences ;  and  that  where  the  same  mischief  exists,  there  is 
the  same  law.  The  cases  of  an  individual  and  of  a  corpora- 
tion, in  the  matter  under  discussion,  it  appears  to  me,  are 
not  merely  analogous,  but  identical ;  and  I  discern  no  reason 
for  the  slightest  difference  between  them.  There  exists  no 
doubt,  that  there  have  been  many  instances  of  actually  in- 
solvent corporations,  where  certain  creditors  have  been  pre- 
ferred to  others;  and  the  perfect  silence  until  now,  on  the 
subject  of  this  fancied  diversity,  is  powerful  to  show  what 
has  been  the  universal  opinion. 

It  however  has  been  insisted  for  the  plaintiff,  that  on 
the  actual  insolvency  of  the  bank,  the  corporation  were  the 
trustees  of  the  creditors;  and  if  this  be  true,  the  latter  be- 
come the  cestity  que  trusts  of  all  the  corporate  estate.  The 
consequence,  on  this  supposition,  would  be,  that  all  persons 
coming  into  possession  of  the  bank  property,  with  notice 
of  the  trust,  must  be  considered  as  trustees.  Daniels  v. 
Davison,  i6  Ves.  jun.  249.  Moore  v.  Butler,  i  Scho.  & 
Lef.  262.  No  express  trust  was  created,  on  the  happening 
of  the  bank's  insolvency;  but  the  charter,  on  every  fair  prin- 
ciple of  construction,  conferred  on  the  corporation  the  en- 
tire control  of  its  property,  as  well  after  as  before  this  event. 

It  however  has  been  imagined,  that  the  trusts  arose  by 
operation  of  law.  I  enquire  of  what  law?  No  principle,  or 
case,  or  analog}^  has  been  referred  to,  that  supports  the 
proposition,  nor  am  I  capable  of  conceiving  any.  The  in- 
solvent banking  corporation  is  just  as  much  a  trustee  of  the 
creditors,  and  no  more,  as  'the  insolvent  individual  is  the 
trustee  of  his  creditors.  The  relation  of  creditor  and  debtor 
exists  in  both  cases;  but  from  this  relation  no  trust  arises. 
Undoubtedly,  in  all  cases  of  actual  insolvency,  the  creditor 
would  derive  security  from  this  doctrine;  and  often  great 
losses  might  be  prevented.  But  the  interest  of  the  insolvent 
person  is  not  to  be  entirely  disregarded.  His  creditor  has 
voluntarilv  become  such  with   full  knowledge,  that  his  se- 


794         FRAUD  ON   CREDITORS  OF  CORPORATION 

curity  must  very  much  depend  on  the  integrity  of  his 
debtor.  With  open  eyes  he  has  given  credit,  and  the  pubhc 
charter  of  the  corporation  has  instructed  him  in  all  the 
powers  and  rights  of  the  corporation.  Now,  it  would  be  a 
very  harsh  and  inequitable  doctrine,  but  on  the  plaintiff's 
claim,  it  is  inevitable,  that  the  moment  a  banking  institution 
is  unable  to  pay  all  its  debts,  the  directors  of  the  bank  may 
not  issue  a  bank  bill,  dispose  of  bank  property,  make  pay- 
ment of  a  single  debt,  or  perform  one  bank  operation.  May 
not  an  individual,  or  mercantile  company,  under  the  same 
circumstances,  proceed  in  the  usual  train  of  business?  This 
is  not  disputed.  It  is  the  law  of  chancery,  that  they  may 
prefer  one  creditor  to  another;  and  this,  on  a  principle  of 
analogy,  refutes,  entirely,  the  supposition  of  a  trust  in  this 
case.  The  novelty  and  unfoundedness  of  the  plaintiff's 
claim  are  such  that  it  is  difficult  to  support,  or  even  to  oppose 
it,  without  taking  leave  of  every  established  principle,  and 
beating  the  air.  That  the  directors  of  the  Eagle  Bank  are 
trustees,  I  admit;  but  they  are  the  trustees  of  the  stock- 
holders. The  stockholders  are  the  cestuy  que  trusts,  and  the 
charge  of  breach  of  trust  must  come  from  them.  The  At- 
torney General  v.  The  Utica  Insurance  Company,  2  Johns. 
Ch.  Rep.  371,  385. 

The  funds  of  the  corporation,  after  its  insolvency,  have 
been  called  equitable  assets;  but  the  name  was  wholly  mis- 
applied. Equitable  assets,  generally  speaking,  are  such  as 
the  debtor  has  made  subject  to  his  debts  generally,  that 
would  not  thus  be  subjected  without  his  act;  (2  Fonb.  Eq. 
402,  n.  d.)  and  which  can  be  reached  only  by  the  aid  of  a 
court  of  equity.  They  are  divisible  among  the  creditors, 
as  all  property  is,  when  placed  under  the  jurisdiction  of  a 
court  of  chancery,  pari  passu,  in  ratable  proportions.  Riggs 
&  al.  V.  Murray  &  al.,2  Johns.  Ch.  Rep.  565,  577.  But  they 
must  be  assets,  or  they  cannot  be  equitable  assets;  and  this 
term  does  not  express  the  nature  of  property,  in  the  hands 
of   an  individual,   partnership   or  corporation   actually   in- 


CATLIN  V.   THE  EAGLE  BANK  795 

solvent.  On  the  estate  of  such  persons,  there  is  no  equitable 
lien  to  interrupt  the  free  progress  of  their  business,  or  pre- 
vent the  fair  disposition  of  their  property.  The  case  of 
Benson  v.  Le  Roy,  4  Johns.  Ch.  Rep.  651,  cited  for  the 
plaintiff,  illustrates  the  principles  advanced.  It  proves  only 
that  a  devise  of  an  estate  to  trustees,  in  trust  to  pay  debts, 
and  distribute  the  residue,  places  the  assets  under  the  juris- 
diction of  the  court.  Undoubtedly,  it  does;  for  by  the  ex- 
press appointment  of  the  devisee,  the  estate  was  a  trust 
estate. 

There  is  a  class  of  cases,  in  which  chancery  has  ex- 
ercised a  control  over  corporations,  in  relation  to  breaches 
of  trust;  but  in  such  cases,  the  jurisdiction  has  alone  been 
extended  to  charitable  institutions.  Shaw  v.  Cunliffe,  4 
Bra.  Ch.  Rep.  145.  Ball  v.  Montgomery,  2  Ves.  jun.  199. 
In  The  King  v.  Watson  &  al.  2  Term  Rep.  199,  the  court, 
however,  intimated,  without  discussion,  if  any  corporation 
misapplied  monies,  that  it  was  an  abuse  of  trust,  which 
might  be  the  subject  of  application  to  the  court  of  chancery. 
This  case  has  been  doubted,  by  Lord  Eldon,  in  Attorney 
General  v.  Carmarthen,  Coop.  Eq.  Rep.  30.,  and  in  com- 
menting upon  it,  it  was  observed,  by  the  late  Chancellor 
Kent,  that  the  chancery  cases  do  not  recognize  any  such 
general  jurisdiction.  Attorney  General  v.  Utica  Insurance 
Co.  2  Johns.  Ch.  Rep.  384.  In  the  case  of  Adley  v.  The 
Whitstahle  Company,  7  Ves.  jun.  315,  Lord  Eldon,  with 
hesitancy,  admitted  a  jurisdiction  in  equity  against  a  cor- 
poration, by  ordering  an  account  of  profits,  when,  by  an  il- 
legal by-law,  the  plaintiff  was  excluded  from  a  share  of 
them.  This,  it  will  be  observed,  was  merely  an  equitable 
interposition,  between  the  persons  interested  in  certain 
profits,  and  does  not  at  all  support  the  principle  that  chan- 
cery, in  behalf  of  a  creditor,  will  take  cognizance  of  cor- 
porate funds  misapplied.  In  Vose  v.  Grant,  15  Mass.  Rep. 
505,  an  action  on  the  case  was  brought  by  a  bill-holder,  to 
recover  a  sum  of  money  of  the  defendant,  as  a  stockholder 


I 


796         FRAUD   ON   CREDITORS  OF  CORPORATION 

and  director  of  a  bank;  the  stockholders  of  the  bank  hav- 
ing divided  their  capital  stock  among  themselves,  so  that  the 
corporate  funds  were  insufficient  to  redeem  the  outstanding 
notes  and  bills.  The  action  was  not  sustained  by  the  court ; 
and  in  giving  his  opinion,  it  was  said  by  Jackson,  J.,  that  a 
court  of  chancery  would  probably  give  relief  against  the 
stockholders.  This  obiter  dictum  of  a  learned  judge,  on  a 
point  not  made  or  discussed,  and  without  the  citation  of 
principle  or  case,  was  not  intended  to  express  any  thing 
more,  than  the  first  impression  of  his  mind;  and  this  is 
clearly  manifested  by  the  word  "probably,"  with  which  the 
intimation  was  accompanied.  On  the  other  hand,  in  the 
Attorney-General  v.  The  Corporation  of  Carmarthen,  Coop. 
Eq.  Rep.  30,  the  jurisdiction  was  denied,  by  the  chancellor, 
in  the  very  case  of  a  misapplication  of  funds.  And  in  the 
Mayor  and  Commonalty  of  Colchester  v.  Lowton,  i  Ves.  & 
Bea.  226,  Lord  Eldon  held,  that  there  was  no  instance  of  a 
trust  attaching,  upon  the  ground  of  a  misapplication  of 
funds  by  corporations,  except  in  the  case  of  corporations 
holding  to  charitable  uses. 

From  this  discussion  it  is  unquestionable,  that  the  juris- 
diction of  chancery  does  not  extend  to  the  disposal  of  the 
corporate  estate  or  funds  of  the  Eagle  Bank.  More  time 
has  been  occupied  in  the  examination  of  the  principle, 
than  perhaps  can  be  justified,  as  it  has  no  application  to  the 
case  before  us.  The  bank  has,  in  no  proper  sense,  misap- 
plied its  funds.  It  has  done  what  it  had  a  right  to  do,  and 
what  is  uncontrollable  by  this  Court;  that  is,  it  has  pre- 
ferred to  pay  and  secure  the  claim  of  what  was  considered 
a  meritorious  creditor.  Of  its  creditors,  the  corporation 
was  not  a  trustee ;  they  had  no  lien  upon  its  funds ;  and  no 
case  is  made  out,  entitling  the  plaintiff  to  relief,  or  show- 
ing any  jurisdiction  exercisable  by  this  Court. 

The  plaintiff's  bill  must  be  dismissed. 


ROUSE  V.  MERCHANTS'   NATIONAL  BANK  797 


ROUSE  V.  MERCHANTS'  NATIONAL  BANK. 

In  the  Supreme  Court  of  Ohio,,  1889. 

46  Ohio  State  Reports,  493' 

Williams^  /.  The  general  question  for  decision  in  this 
case,  is,  however  a  corporation  for  profit,  organized  under 
the  laws  of  this  state,  can,  in  the  disposition  of  the  cor- 
po ration  property,  after  it  has  become  insolvent,  and  ceased 
to  further  prosecute  the  objects  for  which  it  was  created, 
prefer  some  of  its  creditors  over  others. 

The  claim  of  the  plaintiff  in  error  is,  that  when  the  cor- 
poration becomes  insolvent  and  ceases  to  carry  on  business, 
its  property  and  assets  constitute  a  trust  fund  for  the  benefit 
of  its  creditors,  and  the  directors  in  possession  of  the  cor- 
poration property,  being  trustees  for  all  the  creditors,  can- 
not lawfully  dispose  of  it  otherwise  than  for  the  equal  ben- 
efit of  all  the  corporates  creditors.  The  defendant  in  error, 
on  the  other  hand  contends,  that  when  not  restricted  by  the 
law  of  their  creation,  or  prevented  by  the  operation  of  some 
bankrupt  or  insolvent  law,  insolvent  corporations  may,  the 
same  as  natural  persons,  make  preferences  among  their  cred- 
itors. 

Decisions  of  courts  will  be  found,  maintaining  each  of 
these  diverse  positions.  The  precise  question  has  not  been 
decided  in  this  state,  and  in  view  of  the  conflict  of  authority 
elsewhere,  we  are  at  liberty  to  adopt  that  rule,  which  best 
harmonizes  with  the  policy  and  legislation  of  the  state, 
rests  upon  the  sounder  reason,  as  we  conceive  it  to  be,  and 
coincides  with  our  sense  of  justice  and  right. 

The  right  of  the  individual  debtor  to  prefer  one  creditor 
to  another,  though  at  the  time  insolvent,  rests  upon  his  com- 
plete dominion  over,  and  consequent  unrestricted  power  of 


^  The  Reporter's  statement  of  the  facts  of  the  case,  and  his  notes 
of  the  arguments  of  counsel  are  omitted. 


798         FRAUD  OX   CREDITORS  OF  CORPORATION 

disposition  of  his  property.  And  the  cases  which  hold  that 
insolvent  corporations  are  entitled  to  make  preferences 
among  their  creditors,  attribute  to  them,  the  same  unlimited 
control  over  their  property  that  is  possessed  by  individuals 
over  theirs.  In  Catlin  v.  Eagle  Bank  of  New  Haven,  6  Conn. 
233,  which  is  the  leading  case  in  this  country  maintaining 
the  right  of  an  insolvent  corporation  to  prefer  one  or  more 
of  its  creditors  over  others,  the  decision  is  distinctly  placed 
upon  the  ground  that  the  particular  corporation  was  invested 
with  the  control,  and  power  to  dispose  of  the  corporate  prop- 
erty, as  fully  and  to  the  same  extent  that  natural  persons 
have  with  respect  to  their  property.  Hosmer,  C.  J.,  in  the 
opinion  in  that  case,  says :  "If  the  corporation,  so  far  as  re- 
gards its  right  to  manage  and  dispose  of  its  property,  has 
power  analogous  with  that  which  is  vested  in  an  individual, 
the  plaintiff's  bill  is  wholly  destitute  of  merits.  *  *  * 
The  cases  of  an  individual  and  of  a  corporation  in  the  mat- 
ter under  discussion,  it  appears  to  me,  are  not  merely  anal- 
agous,  but  identical ;  and  I  discern  no  reason  for  the  slightest 
difference  between  them."  And  again  he  says  that  "no  ex- 
press trust  was  created  on  the  happening  of  the  bank's  insolv- 
ency ;  hilt  the  charter,  on  every  fair  principle  of  construction, 
conferred  on  the  corporation  the  entire  control  of  its  prop- 
erty, as  ivcll  after,  as  before  this  event.  *  *  *  "The  in- 
solvent banking  corporation  is  just  as  much  a  trustee  of  the 
creditors,  and  no  more,  as  the  insolvent  individual  is  the 
trustee  of  his  creditors.  The  relation  of  creditor  and  debtor 
exists  in  both  cases;  but  from  this  relation  no  trust  arises." 

We  have  not  the  charter  of  the  corporation  in  question 
in  that  case  before  us,  but  we  assume  that  the  learned  Judge 
was  correct  in  saying  that  by  every  fair  construction,  it  con- 
ferred upon  the  corporation  the  entire  control  of  its  property 
after  its  insolvency;  if  so,  no  fault  need  be  found  with  his 
conclusion,  that  it  might,  like  any  individual,  prefer  some  of 
its  creditors  over  others. 

Corporations  generally  do  not  possess  such  amplified 


ROUSE  V.  MERCHANTS'   NATIONAL  BANK  799 

powers,  and  especially  those  created  under  the  laws  of  this 
state.  In  this  state,  corporations  have  not  the  same  powers 
and  capacities  as  natural  persons,  but  are  authorized  for  spe- 
cified and  defined  purposes.  They  are  clothed  with  those  at- 
tributes only,  with  which  the  law,  under  which  they  are 
created,  invests  them,  and  can  exercise  no  powers  not  ex- 
pressly conferred,  or  necessary  to  carry  into  effect  those  in 
terms  granted. 

Since  the  constitution  of  1851,  it  has  been  the  settled 
policy  of  this  state,  to  afford  adequate  protection  to  the  cred- 
itors of  corporations.  That  constitution  contains  the  provi- 
sion that  "dues  from  corporations  shall  be  secured  by  such 
individual  liability  of  the  stockholders,  and  other  means,  as 
Jiay  be  prescribed  by  law;  but  in  all  cases,  each  stockholder 
shall  be  liable,  over  and  above  the  stock  by  him  or  her  owned, 
and  any  amount  unpaid  thereon,  to  a  further  sum,  at  least 
equal  in  amount  to  such  stock."  Legislation,  under  this 
constitution  has  been  shaped  to  fully  effectuate  the  consti- 
tutional guarantee.  All  corporations  organized  for  profit, 
are  required  to  have  a  capital  stock,  fifty  per  cent,  of  which 
must  be  subscribed,  and  at  least  ten  per  cent,  paid  in,  be- 
fore the  organization  can  be  effected  and ;  and  the  stock- 
holders are  made  liable,  in  addition  to  their  stock,  to  an 
amount  equal  to  the  stock  held  by  them,  to  secure  the  pay- 
ment of  the, debts  of  the  corporation.  This  liability  it  has 
uniformly  been  held  by  this  court,  is  a  security  exclusively 
for  the  benefit  of  the  creditors  of  the  corporation,  over 
which  the  corporation  has  no  control ;  and,  moreover,  the 
security  is  for  the  equal  benefit  of  all  the  creditors.  The 
suit  to  enforce  it  must  be  by  all  the  creditors,  and  against 
all  the  stockholders;  and  no  creditor  can  acquire  priority 
over  the  others,  with  respect  to  it.  And,  while  power  is  con- 
ferred on  corporations  to  reduce  their  capital  stock,  it  is  ex- 
pressly provided  that  the  rights  of  creditors  shall  not  be 
affected,  nor  in  any  way  impaired.  The  corporate  powers, 
business  and  property  of  the  corporation,  must  be  exercised. 


800         FRAUD   ON    CREDITORS   OF  CORPORATION 

conducted  and  controlled  by  a  board  of  directors,  all  of 
whom  must  be  stockholders ;  and,  as  a  still  further  guarantee 
for  creditors,  the  powers  of  corporations  over  their  prop- 
erty, its  use  and  disposition,  are  so  circumscribed  by  posi- 
tive statute  that  no  corporation  can  employ  its  stock,  means, 
assets  or  other  property,  directly  or  indirectly,  for  any  other 
purpose  whatever,  than  to  accomplish  the  legitimate  objects 
of  its  creation.  The  extent  of  the  powers  expressly  con- 
ferred on  them  are,  to  sue  and  be  sued,  contract  and  be  con- 
tracted with,  and  acquire  and  convey  such  real  and  personal 
estate  as  may  be  necessary  or  convenient  to  carry  into  effect 
the  objects  of  the  incorporation,  to  make  and  use  a  common 
seal,  and  do  all  needful  acts  to  carry  into  effect  the  objects 
for  which  they  are  created.  It  is  obvious,  that  the  corporate 
property,  can  not  with  propriety  be  said  to  be  owned  by  the 
corporation,  in  the  sense  of  ownership  as  applied  to  prop- 
erty belonging  to  natural  persons.  The  latter  may  without 
restriction,  acquire  and  dispose  of  property  for  any  lawful 
purpose,  while  both  the  power  of  acquisition  and  disposition 
of  the  former,  are  limited  to  the  special  objects  already  men- 
tioned. The  corporate  property  is  in  reality  a  fund  set 
apart  to  be  used  only  in  the  attainment  of  the  objects  for 
which  the  corporation  was  created,  and  it  can  not  lawfully 
be  diverted  to  any  other  purpose.  As  soon  as  acquired,  it 
becomes  impressed  with  the  character  of  a  trust  fund  for  that 
purpose  and  the  shareholder  or  creditor  may  interpose  to 
prevent  its  diversion  from  the  objects  of  the  incorporation, 
injurious  to  him.  Taylor  on  Private  Corporations,  sec.  34. 
The  custody  and  control  of  the  property,  and  the  man- 
agement of  the  business  of  the  corporation,  are  confided  to 
a  board  of  directors  chosen  by  the  shareholders.  Into  the 
hands  of  these  officers,  through  whom  alone  corporations 
can  act,  the  shareholders  surrender  their  funds,  and  entrust 
the  management  of  the  affairs  and  property  of  the  corpora- 
tion to  them.  A  relation  of  trust  and  confidence,  therefore, 
arises  between  the  stockholders  and  directors  of  a  corpora- 


ROUSE  V.  MERCHANTS'   NATIONAL  BANK  801 

tion,  out  of  which  grow  the  duties  of  the  latter,  to  so  ad- 
minister the  trust  as  will  best  promote  the  interests  of  the 
former,  to  pay  them  their  appropriate  dividends  from  time 
to  time,  and  upon  the  termination  of  the  corporation,  to 
distribute  to  them  their  respective  shares  of  the  corporate 
property,  after  the  payment  of  its  debts  and  liabilities. 
These  duties  are  eminently  of  a  fiduciary  nature.  It  is  now  so 
well  established  as  to  be  no  longer  a  subject  of  controversy, 
that  the  relation  of  trustee  and  cestui  que  trust  subsists  be- 
tween the  directors  and  shareholders.  And  since  the  direc- 
tors, as  such  trustees,  represent  and  act  for  all  the  share- 
holders, they  cannot  lawfully  favor  any  particular  share- 
holder or  class  of  shareholders,  but  every  authority  and 
power  possessed  by  them,  must  be  exercised  for  the  benefit 
of  all  alike.  Otherwise,  no  corporation  could  endure.  If 
the  directors  and  officers  of  a  corporation  were  allowed,  in 
the  conduct  of  the  business,  and  disposition  of  the  property, 
to  favor  one  or  more  shareholders  to  the  detriment  of  the 
others,  the  minority  would  be  the  prey  of  the  majority;  for, 
it  would  then  be  within  the  power  of  the  majority  to  com- 
bine and  elect  the  officers,  who  in  turn  should  manage  the 
whole  business  and  apply  the  whole  corporate  property  for 
the  benefit  of  the  majority,  and  thus  practically  confiscate 
the  entire  property  interest  of  the  minority.  Corporations 
would  thus  become  traps  for  the  unwary,  and  legalized  in- 
struments, of  fraud.  The  doctrine  that  the  directors  are 
trustees  for  the  shareholders,  and  for  the  equal  benefit  of 
all,  it  is  obvious,  is  essential  to  the  existence  of  corporations. 
But,  it  is  the  right  of  the  creditors,  equally  with  the 
shareholders,  to  have  the  corporate  property  applied  to  the 
purposes  for  which  the  corporation  was  created,  and  this 
includes  the  payment  of  the  corporate  indebtedness  con- 
tracted in  the  prosecution  of  its  business.  The  rights  of  the 
creditors  to  the  corporate  property,  so  far  as  it  is  necessary 
to  meet  their  demands,  are  superior  to  those  of  stock- 
holders. 


802         FRAUD   ON   CREDITORS  OF  CORPORATION^' 

In  Perry  on  Trusts,  sec.  242,  the  relative  rights  of  the 
creditors  and  shareholders  are  thus  defined :  "A  corpora- 
tion holds  its  property  in  trust,  first  to  pay  its  creditors,  and 
second  to  distribute  to  its  stockholders  pro  rata-.  If,  there- 
fore, a  corporation  should  dissolve,  and  divide  its  property 
among  its  shareholders  without  first  paying  its  debts,  equity 
would  enforce  the  claims  of  its  creditors  by  converting  all 
persons,  except  bona  fide  purchasers  for  value,  to  whom 
the  property  had  come,  into  trustees,  and  would  compel 
them  to  account  for  the  property  and  contribute  to  the  pay- 
ment of  the  debts  of  the  corporation  to  the  extent  of  its 
property  in  their  hands." 

It  is  now  firmly  established,  that  the  property  and  as- 
sets of  a  corporation  are  a  trust  fund  for  the  payment  of 
its  debts,  especially  in  case  of  its  insolvency.  Since  the  case 
of  Wood  V.  Diimmer,  3  Mason,  311,  where  Mr.  Justice 
Story  is  said  to  have  first  formulated  the  doctrine,  it  has 
been  generally  accepted,  and  is  sustained  by  the  highest 
authority.  Mr.  Justice  Swayne  announces  it  with  great 
clearness  in  Sanger  v.  Upton,  91  U.  S.  56,  60,  as  follows: 
"The  capital  stock  of  an  incorporated  company  is  a  fund 
set  apart  for  the  payment  of  its  debts.  It  is  a  substitute 
for  the  personal  liabilities  which  subsist  in  private  co-part- 
nerships. When  debts  are  incurred,  a  contract  arises  with 
the  creditors  that  it  shall  not  be  withdrawn  or  applied,  other- 
wise than  upon  their  demands,  until  such  demands  are  sat- 
isfied. The  creditors  have  a  lien  upon  it  in  equity.  If  di- 
verted, they  may  follow  it  as  far  as  it  can  be  traced,  and 
subject  it  to  the  payment  of  their  claims,  except  as  against 
holders  who  have  taken  it  bona  fide  for  a  valuable  consid- 
eration, and  without  notice.  It  is  publicly  pledged  to  those 
who  deal  with  the  corporation,  for  their  security."  In 
Curran  v.  State  of  Arkansas,  15  How.  312,  Mr.  Justice 
"Curtis  said  on  this  subject.  "The  capital  and  debts  of  bank- 
ing and  other  moneyed  corporations,  constitute  a  trust  fund 
and  pledge  for  the  payment  of  its  creditors  and  stockhold- 


ROUSE  V.  MERCHANTS'   NATIONAL  BANK  803 

ers,  and  a  court  of  equity  will  lay  hold  of  the  fund,  and  see 
that  it  be  duly  collected  and  applied."  And  in  Upton,  as- 
signee V.  Tribilcock,  91  U.  S.  45,  47,  Mr.  Justice  Hunt  thus 
lays  down  the  doctrine:  "The  capital  stock  of  a  moneyed 
corporation  is  a  fund  for  the  payment  of  its  debts.  It  is  a 
trust  fund,  of  which  the  directors  are  the  trustees.  It  js  a 
trust  to  be  managed  for  the  benefit  of  its  shareholders  dur- 
ing its  life  and  for  the  benefit  of  its  creditors  in  the  event  of 
its  dissolution.  This  duty  is  a  sacred  one,  and  can  not  be 
disregarded.  Its  violation  will  not  be  undertaken  by  any 
just-minded  man,  and  will  not  be  permitted  by  the  courts." 
The  doctrine  is  sustained  by  many  authorities :  2 
Story's  Eq.  sec.  1252;  Pomeroy's  Eq.,  sec.  1046;  Taylor 
on  Private  Corp.,  sec.  654,  655 ;  Haywood  v.  The  Lincoln 
Lmnher  Co.,  64  Wis.  639.  It  was  held  by  this  court,  as 
early  as  Taylor  v.  Miami  Exporting  Co.,  5  Ohio,  165,  where 
the  opinion  of  Mr.  Justice  Story  in  Wood  v.  Dunimer. 
supra,  is  quoted  with  approbation,  and  it  is  more  distinctly 
announced  in  the  later  case  of  Gooden  v.  The  Canal  Co.,  18 
Ohio  St.  182,  where  it  is  said  to  be  "well  settled  that  the 
property  of  a  corporation  is  a  trust  fund  in  the  hands  of 
its  directors,  for  the  benefit  of  its  creditors  and  stock- 
holders." 

It  being  established  that  the  corporate  property  is  a 
trust  fund  for  the  benefit  of  the  corporate  creditors,  i.t  fol- 
lows, that  after  the  insolvency  of  the  corporation  is  ascer- 
tained, and  the  objects  of  its  creation  are  no  longer  pursued, 
the  managing  board  of  directors  then  having  the  custody 
of  the  property,  become  trustees  thereof  for  the  creditors; 
and  this  relation,  necessarily  forbids  any  discrimination  be- 
tween the  beneficiaries,  in  the  distribution  or  application  of 
'  the  fund.  The  due  execution  of  the  trust,  demands  abso- 
lute impartiality  toward  the  cestui  que  trustent.  They  must 
be  treated  alike,  and  no  preference  can  be  made  among  them, 
without  a  direct  violation  of  the  duties  arising  from  the  re- 
lation.    It  would  seem  clear,  that,  if  the  corporate  prop- 


804         FRAUD   ON   CREDITORS  OF  CORPORATION 

erty  constitutes  a  fund  for  the  creditors,  it  is  as  much  so  for 
one  creditor  as  for  another,  and  that  the  directors  in  posses- 
sion, are  without  authority  to  dispose  of  it  in  disregard  of 
the  rights  of  any  creditor.  They  can  no  more  discriminate 
between  creditors  in  such  case,  than  they  could,  before  the 
insolvency  of  the  corporation,  between  the  shareholders.  The 
objects  for  which  the  corporation  was  created  being  no 
longer  prosecuted,  and  the  occasion,  for  the  exercise  by  the 
board  of  directors,  of  the  power  of  control  and  disposition 
of  the  property  for  such  purpose  having  ceased,  there  re- 
mains no  purpose  to  which  its  assets  can  lawfully  be  devoted, 
except  to  the  payment  of  the  debts.  In  equity  the  corporate 
property  becomes  the  property  of  the  creditors,  and  their 
equities  are  equal.  Every  creditor,  who  became  such  by 
parting  with  his  money,  property  or  other  thing  of  value  to 
the  corporation,  contributed  to  the  accomplishment  of  its 
purposes,  and  augmented  its  corporate  fund;  and  when  the 
fund  is  no  longer  demanded  for  the  purposes  of  the  corpora- 
tion, the  rights  of  the  creditors  become  fixed  instantly  and 
equally;  for  each,  having  contributed  to  the  common  fund, 
has  an  interest  in  it,  in  proportion  to  his  claim,  equally  with 
every  other  creditor.  This  interest  is  sometimes  called  the 
equitable  lien  of  the  creditor  on  the  corporate  property, 
which  enables  him  to  follow  it,  even  after  it  has  left  the 
hands  of  the  directors,  wherever  it  can  be  found,  except  in 
the  possession  of  bona  fide  purchasers  for  value,  and  subject 
it  to  the  payment  of  the  corporate  indebtedness.  It  would 
seem  to  result  as  a  necessary  consequence,  that  insolvent 
corporations  which  have  ceased  to  carry  on  business,  cannot, 
by  pledge  or  mortgage  of  the  corporate  property  to  some  of 
the  creditors,  in  payment  or  security  of  antecedent  debts, 
without  other  consideration,  create  valid  preferences  in  their 
favor  over  others;  and  this  is  the  view  maintained  by  the 
more  recent  writers  on  the  subject. 

In  the  last  edition  of  Taylor  on  Private  Corporations,,  it 
is  said:    "When  corporations  become  insolvent,  the  duty  of 


ROUSE  V.  MERCHANTS'   NATIONAL  BANK  805 

the  directors  toward  its  creditors  becomes  even  stricter  and 
more  imperative;  for,  under  such  circumstances,  the  rights 
of  creditors  are  paramount,  and  it  has  become  probable  that 
they  will  be  somewhat  damaged;  and  the  plain  duty  of  di- 
rectors who  control  the  funds  from  which  corporate  debts 
are  paid,  is  to  see  that  the  loss  is  as  small  as  possible.  More- 
over, since,  upon  the  insolvency  of  the  corporation,  the 
rights  of  unsecured  creditors  are  equal,  it  would  seem  to  be 
unlawful,  even  in  the  absence  of  a  statute  expressly  forbid- 
ding it,  for  directors  to  make  preferences  among  them." 
(Sec.  759.)  And,  in  sec.  668,  it  is  further  said:  "To  allow 
an  insolvent  corporation  to  make  an  assignment  of  its  prop- 
erty, giving  preferences  to  a  portion  of  its  creditors  over  the 
others,  is  unjust,  as  well  as  utterly  repugnant  to  the  doctrine 
that  corporate  property  is  a  trust  fund,  on  the  credit  of 
which  persons  contract  with  the  corporation.  If  such  prop- 
erty constitutes  such  a  fund,  it  is  clearly  held  in  trust  for 
the  benefit  of  one  creditor  just  as  much  as  another,  and  to 
prefer  one  creditor  to  another  is  evidently  beyond  the  author- 
ity of  the  trustee.  This  view  is  far  from  being  unsupported 
by  direct  authority." 

Mr.  Morawitz,  in  his  excellent  work  on  private  corpora- 
tions, referring  to  the  cases  which  hold  that  corporate  prefer- 
ences are  valid,  says : 

"This  doctrine,  in  the  opinion  of  the  writer,  is  wholly 
indefensible  on  principle.  The  capital  provided  for  the  secur- 
ity of  the  creditors  of  a  corporation  is  a  fund  held  for  the 
benefit  of  all  the  creditors  equally.  That  the  unsecured 
creditors  of  a  corporation  are  entitled  to  an  equal  distribu- 
tion of  the  common  security,  has  often  been  recognized  by 
the  courts  of  equity  in  adjusting  the  rights  of  creditors 
among  themselves,  and  in  relation  to  the  company's  share- 
holders. After  a  corporation  has  become  insolvent,  and  has 
ceased  to  carry  on  business,  the  rights  of  its  creditors,  be- 
come fixed.  If  a  corporation,  whose  assets  are  not  sufficient 
to  satisfy  all  of  its  creditors  in  full,  can  prefer  certain  cred- 


<Sn6         I'RAUD   OX   CREDITORS  OF  CORPORATION 

itors,  leaving  others  unpaid,  this  must  be  by  virtue  of  a 
power  reserved  by  implication  to  the  company  and  its  agents. 
But  this  power  cannot  justly  be  included  in  the  general 
powers  of  management  which  a  corporation  must  necessarily 
possess  over  its  property,  in  order  to  carry  on  its  business 
and  further  the  purposes  for  which  the  company  was 
formed.  The  purposes  of  a  corporation  are  not  furthered  in 
any  manner,  by  giving  it  or  its  agents  the  power,  after  the 
company  has  become  insolvent  and  has  ceased  to  carry  on 
business,  and  after  its  shareholders  have  lost  their  interests 
in  the  corporate  estate,  to  prefer  a  portion  of  the  creditors, 
according  to  interest  or  mere  whim,  and  to  pay  their  claims 
in  full,  leaving  the  others  wholly  without  redress.  The  doc- 
trine that  an  insolvent  corporation  may  prefer  certain  cred- 
itors at  the  expense  of  others,  seems  to  have  been  first  started 
in  Caflin  v.  Eagle  Bank,  (6  Conn.  2T)2>)y  ^  case  in  which  the 
fundamental  rule  that  the  assets  of  an  insolvent  corporation 
constitute  a  trust  fund  pledged  for  the  security  of  creditors 
was  denied.  It  is  a  doctrine  which  is  at  variance  with  the 
whole  theory  of  the  law  concerning  the  rights  of  creditors 
of  insolvent  corporations,  and  is  contrary  to  the  plainest  prin- 
ciples of  justice."     (2  Morawitz,  Corporations,  sec.  803.) 

And  in  a  very  recent  work  on  insolvent  corporations  it  is 
said :  "The  practical  working  of  the  rule  sustaining  corpo- 
rate preferences  is  monstrous.  The  unpreferred  creditors 
have  only  a  myth  or  shadow  left  to  which  resort  can  be  had 
for  payment  of  their  claims ;  a  soulless,  fictitious,  unsubstan- 
tial entity  that  can  be  neither  seen  nor  found.  The  capital 
and  assets  of  the  corporation,  the  creditors'  trust  fund,  may, 
under  this  rule,  be  carved  out  and  apportioned  among  a 
chosen  few,  usually  the  family  connections  or  immediate 
friends  of  the  officers  making  the  preference.  This  rule  of 
law  is  entitled  to  take  precedence  among  the  many  reckless 
absurdities  to  be  met  with  in  cases  affecting  corporations,  as 
being  a  manifest  travesty  upon  natural  justice."  (Wait  on 
Insolv.   Corporations,   section   162.)      "Elsewhere  we  have 


ROUSE  V.  MERCHANTS'   NATIONAL  BANK  80/ 

deprecated  the  right  which  is  recognized  in  a  number  of 
cases,  of  insolvent  corporations  to  make  preferential  assign- 
ments. It  would  seem  to  be  an  idle  waste  of  words  to  desig- 
nate the  capital  and  assets  of  a  corporation  as  a  trust  fund 
for  the  benefit  and  security  of  creditors  in  the  event  of  dis- 
solution or  insolvency,  if  one  of  the  first  principles  of  the 
law  of  trusts — equality  of  distribution — could  be  openly  vio- 
lated, and  the  effects  of  the  bankrupt  company  apportioned 
among  a  favored  few."     (lb.,  section  654.) 

Without  extending  the  discussion,  we  are  of  opinion 
that  when  a  corporation  for  profit,  organized  under  the  laws 
of  this  state,  becomes  insolvent  and  ceases  to  carry  on  its 
business  or  further  pursue  the  purposes  of  its  creation,  the 
corporate  property  constitutes  a  trust  fund  for  the  equal 
benefit  of  the  corporate  creditors,  in  proportion  tp  the 
amounts  of  their  respective  claims ;  and  that  it  cannot  then, 
by  pledge  or  mortgage  of  the  property  to  some  of  its  cred- 
itors as  security  for  antecedent  debts,  without  other  con- 
sideration, create  valid  preferences  in  their  behalf,  over  the 
other  creditors,  or  over  an  assignment  thereafter  made  for 
the  benefit  of  creditors. 

Instead  of  the  individual  liability  of  the  stockholders 
being  a  ground  of  objection  to  this  conclusion,  it  furnishes 
•an  additional  reason  in  its  support.  It  is  well  settled  that  the 
corporate  property  is  the  primary  fund  for  the  payment  of 
the  debts  of  the  corporation,  and  the  statutory  liability  of  the 
stockholder  is  a  security  to  be  resorted  to  only  when  the 
payment  of  its.  debts. cannot  be  enforced  against  its  propert}^ ; 
.and  .it  w.a.s  \\Q\(l-m- Harp  old  v.-Stobart,  decided  .-at  this  t-erm, 
that  s.tockhoklers  who  have  assigned  their  stock  tO' an  .in- 
solvent assignee,  are  liable  only  for  such  portion  of  the  debts 
existing  while  they  were  such  stockholders,  as  is  equal  to 
.the  proportion  which  their  stock  bears  to  the  stock  held  by 
all  stockholders  liable  for  the  same  debts.  Admit  the  power 
of  the  board  of  directors  of  .an  insolvent  corporation  to 
make  preferences  among  its  creditors,  and-  it.  ijiust-  f oIIqw 


808         FRAUD   ON   CREDITORS  OF  CORPORATION 

that  they  may  prefer  any  they  choose  to  select  for  that 
purpose.  This  would  be  wholly  inconsistent  with  the  trust 
relation  subsisting  between  the  directors  and  shareholders, 
for  since  different  stockholders,  or  classes  of  stockholders 
may  be  liable  for  different  debts,  and  not  all  for  the  same 
debts,  if  the  directors  could  apply  the  corporate  property 
to  some  of  its  debts  leaving  others  entirely  unprovided  for, 
they  would  be  at  liberty  to  select  the  debts  for  which  particu- 
lar stockholders  alone  were  liable,  and  appropriate  all  of  the 
property  to  their  satisfaction,  leaving  the  other  stockholders 
to  respond  to  the  full  extent  of  their  statutory  liability,  for 
the  remaining  debts.  The  directors  would  in  this  way,  be 
enabled  to  apply  the  whole  corporate  property  to  their  own 
exoneration. 

Whether  an  insolvent  corporation,  which  is  still  a  going 
concern,  and  in  good  faith  engaged  in  the  prosecution  of  its 
business,  may  borrow  money,  or  contract,  or  procure  an  ex- 
tension of  other  bo>ia  fide  indebtedness,  and  convey  or  pledge 
the  corporate  property  in  security  thereof,  is  a  question  not 
involved  in  this  case,  and  upon  which  we  here  express  no 
opinion. 

It  appears  from  the  finding  of  facts  in  this  case,  that  the 
directors  of  the  corporation  declared  its  insolvency,  and  di- 
rected by  the  same  resolution,  the  execution  of  an  assignment 
for  the  benefit  of  its  creditors,  and  of  the  preferential  mort- 
gages to  the  bank,  and  other  creditors.  It  does  not  appear, 
that  there  had  been  any  agreement  between  the  mortgagees 
and  the  corporation  that  such  mortgages  should  be  given, 
nor,  that  they  were  given  for  any  other  consideration  than 
the  antecedent  indebtedness  of  the  corporation  to  the  cred- 
itors receiving  them.  Being  merely  voluntary  mortgages  to 
secure  pre-existing  debts,  without  other  consideration,  they 
cannot  prevail  against  the  equitable  rights  of  the  corporate 
creditors.     Lezvisy.  Anderson,  20  Ohio  St.  281. 

Counsel  have  argued  at  length,  and  with  great  ability, 
another  question  sufficiently  raised  on  the  record,  and  that  i.. 


ROUSE  V.  MERCHANTS'   NATIONAL  Bx\NK  809 

whether,  in  view  of  the  facts  found  by  the  court  below 
that  the  execution  of  the  assignment  for  the  benefit  of  cred- 
itors, and  the  preferential  mortgages,  was  directed  by  the 
same  resolution,  and  were  in  fact  executed  at  the  same  time, 
the  several  instruments  may  not  be  treated  as  constituting 
together  an  assignment  in  trust,  with  intent  to  prefer  the 
mortgagees,  and  so  inure  to  the  equal  benefit  of  all  creditors. 
The  determination  of  this  question  not  being  necessary  to 
the  decision  of  the  case,  no  opinion  is  expressed  upon  it. 

Other  questions  presented  in  the  argument,  and  con- 
sidered by  the  court,  do  not  call  for  further  report. 

No  serious  objection  is  made  here  to  so  much  of  the 
judgment  of  the  court  below  as  establishes  the  amount  of 
the  plaintiff's  claim,  and  requires  the  assignee  to  allow  the 
same  in  the  administration  of  his  trust,  and  to  that  extent 
the  judgment  is  affirmed.  But  the  judgment  establishing  the 
validity  of  the  mortgage,  and  giving  it  priority  over  the 
assignment,  is  reversed,  and  judgment  will  be  entered  upon 
that  branch  of  the  case  for  the  trustee. 

Judgment  accordingly.^ 

*  Compare:  Fowler  v.  Bell,  90  Tex.  150,  1896.  (The  law  of  Iowa 
permits  a  corporation  to  prefer  creditors ;  the  law  of  Texas  prohibits 
such  preferences.  The  A  Company,  an  Iowa  corporation,  did  business 
and  owned  property  in  Texas.  It  executed  in  Iowa  a  mortgage  to  C, 
a  creditor,  on  its  land  in  Texas,  the  mortgage  amounting  to  a  prefer- 
ence.    Held,  that  the  mortgage  was  void.) 

For  cases  accord  and  contra  involving  preferences  to  the  creditors 
Of  a  corporation  gencvally;  See  Amer.  Dig.  tit.  Corporations,  Key,  No. 
544;  12  Cent.  Dig.  tit.  Corporations,  §§  2162-2169;  Also,  10  Cyc.  1246. 
et  seq. 


810         FRAUD  ON   CREDITORS  OF  CORPORATION 


OLNEY  V.  THE  CONANICUT  LAND  CO. 
In  the  Supreme  Court  of  Rhode  Island,  1889. 

16  Rhode  Island  Reports,  597. 
Bill  in  Equity  to  annul  a  mortgage  and  for  a  receiver. 

Stiness,  /.  The  complainants,  judgment  creditors  of 
the  Conanicut  Land  Company,  seek  to  set  aside  a  mortgage 
given  to  the  defendants  Lippitt,  Davis,  and  Bradford,  to 
secure  them  for  advances,  and  for  their  indorsements 
of  the  notes  of  the  company.  The  mortgage  was  given 
immediately  after  the  complainants  had  brought  suits  for 
damage  against  the  company  for  negligence,  and  zvlicii 
the  company  zuas  insolvent;  the  agreed  statement  of 
facts  showing  that  it  had  not  sufficient  assets  with  which 
to  discharge  all  its  outstanding  indebtedness,  were  pay- 
ment of  the  same  to  be  demanded  when  due.  Since  then 
the  complainants  have  levied  execution  on  the  property 
of  the  company.  The  complainants  claim  that,  as  the  mort- 
gagees are  three  of  the  four  directors  who  voted  to  give  the 
mortgage,  thereby  securing  themselves,  their  action  is  so  in- 
consistent with  their  fiduciary  relation  that  it  should  be  set 
aside.  No  fraudulent  act  in  regard  to  the  giving  of  the 
mortgage  is  alleged,  other  than  the  fact  itself  and  the  case 
being  submitted  on  bill,  answer,  and  agreed  facts  as  to  the 
validity  of  the  mortgage,  we  have  the  simple  question 
whether  their  directors  of  an  insolvent  corporation  are  de- 
barred in  equity,  by  virtue  of  their  positions,  from  preferring 
debts  due  to  themselves.  In  so  far  as  the  mortgage  is  to  be 
regarded  as  a  mere  preference,  it  is  not  contended  that 
it  is  invalid.  Except  as  limited  by  statute,  the  right  of  a 
debtor  to  prefer  a  part  of  his  creditors  has  always  been  up- 
held in  this  State.  Dockray  v.  Dockray,  2  R.  I.  547; 
Elliott  V.  Benedict,  13  R.  I.  463.  The  vital  question  is, 
whether  a  director  of  an  insolvent  corporation  is  to  be  re- 


OLNEY  V.  THE  CONANICUT  LAND  CO.  811 

garded  as  a 'trustee  for  its  creditor.  If  he  is  so,  the  duty 
of  a  trustee  to  a  cestui  que  trust  is  plain.  For  a  trustee  to 
collect  his  own  debts,  to  the  detriment  of  that  of  his  cestui, 
is  a  clear  breach  of  fidelity.  When  one  accepts  the  trust 
of  caring  for  another's  interest  he  accepts  the  attendant 
duty.  It  must  be  admitted  that  directors  of  a  corporation 
are  not  technical  trustees.  They  do  not  have  in  themselves 
the  title  to  property  which  they  hold  for  the  benefit  of 
others;  and  certainly,  as  to  creditors,  they  are  under  no 
express  trust.  The  corporation  is  a  legal  being,  distinct 
from  its  stockholders  and  officers.  It  may  deal  with  them 
as  individuals  and  may  owe  them  debts.  It  holds  its  own 
property,  and  has  the  capacity  and  responsibility  of  acting 
for  itself.  Nevertheless  the  conduct  of  its  affairs  must,  of 
necessity,  be  intrusted  to  officers  in  whom  confidence  is 
reposed,  to  whom  large  powers  are  given,  and  by  whom 
its  property  is  managed  for  the  common  benefit.  As  cor- 
porations have  multiplied  and  have  become  so  greatly 
concerned  in  business  affairs  in  recent  years,  the  obligations 
arising  from  such  a  relation  have  become  correspondingly 
prominent.  While  the  decisions  in  regard  to  this  relation 
are  not  harmonious,  it  has  been  generally  agreed  that  di- 
rectors are  trustees  for  stockholders.  This  being  estab- 
lished, we  think  it  follows  naturally  that,  when  the  cor- 
poration becomes  insolvent  and  the  stockholders  have  no 
longer  a  substantial  interest  in  the  property  of  the  cor- 
poration, directors  should  be  regarded  as  trustees  of  the 
creditors  to  whom  the  property  of  the  corporation  must  go. 
If  directors,  with  their  office,  assume  the  duty  of  caring  for 
the  interests  of  the  stockholders,  why  do  they  not  also 
assume  the  duty  incidentally  of  caring  for  the  interests 
of  those  who,  instead  of  the  stockholders,  may  come  to 
have  claims  upon  the  corporate  property 

In  speaking  of  directors  as  trustees  for  stockholders, 
Mr.  Justice  Miller,  in  Saivycr  v.  Hoag,  ly  Wall,  6io,  calls 
this  "a  doctrine  of  modern  date ;"  1)ut  as  long  ago  as  the  time 


812         FRAUD   ON   CREDITORS   OF  CORPORATION 

of  Lord  Hardwicke  we  find  the  duties  and  obligations  of  a 
director  of  a  corporation  thus  clearly  set  forth :  "I  take 
the  employment  of  a  director  to  be  of  a  mixed  nature ;  it  par- 
takes of  the  nature  of  a  public  office,  as  it  arises  from  the 
charter  of  the  crown.  But  it  cannot  be  said  to  be  an  em- 
ployment affecting  the  public  government.  Therefore  coril- 
mittee  men  are  most  properly  agents  to  those  who  employ 
them  in  this  trust,  and  who  empower  them  to  direct  and 
superintend  the  affairs  of  the  corporation.  By  accept- 
ing a  trust  of  this  sort,  a  person  is  obliged  to  execute  it  with 
fidelity  and  reasonable  diligence ;  and  it  is  no  excuse  to  say 
that  they  had  no  benefit  from  it,  but  that  it  was  merely 
honorary ;  and  therefore  they  are  within  the  case  of  com- 
mon trustees."  Charitable  Corporation  v.  Sutton,  2  Atk. 
400.  To  the  effect  that  officers  of  a  corporation  are  trustees 
for  the  stockholders,  see  Hodges  v.  New  England  Screw 
Co.  I  R.  I.  312;  Hoyle  v.  Plattshurgh  &  Montreal  R.  R. 
Co.  54  N.  Y.  314;  Koehler  v.  Black  River  Co.  2  Black, 
715;  York  &  North  Midland  Railway  Co.  v.  Hudson,  16 
Beav.  485;  19  Eng.  Law  &  Eq.  361;  Great  Luxembourg 
Railway  v.  Magnay,  25  Beav.  586;  Hope  et  ux.  v.  Valley 
City  Salt  Co.  25  W.  Va.  789.  Indeed,  no  cases,  that  we 
know  of,  deny  a  fiduciary  relation  of  directors  to  stock- 
holders, however  they  may  differ  in  the  use  of  terms  to 
describe  it.  This  relation  has  led  logically  to  the  conclusion 
that  in  case  of  insolvency,  the  assets  of  the  corporation 
being  no  longer  held  for  the  benefit  of  stockholders,  but 
for  the  benefit  of  creditors,  the  directors  owe  to  the  cred- 
itors the  duty  of  a  trustee.  This  duty  is  clearly  stated  by 
Clifford,  /.,  in  Bradley  v.  Converse,  4  Cliff.  375  :  "Assets 
of  an  incorporated  company  are  regarded  in  equity  as  held 
in  trust  for  the  payment  of  the  debts  of  the  corporation, 
and  courts  of  equity  will  enforce  the  execution  of  such  trusts 
in  favor  of  creditors,  even  when  the  matter  in  controversy 
may  not  be  cognizable  in  a  court  of  law.  Such  assets  are 
usually  controlled  and  managed  by  directors  or  trustees,  but 


OLNEY  V.  THE  CONANICUT  LAND  CO.  813 

courts  of  equity  will  not  permit  such  managers,  in  dealing 
with  the  trust  estate,  in  the  exercise  of  the  powers  of  their 
trust,  to  obtain  any  undue  advantage  for  themselves,  to  the 
injury  or  prejudice  of  those  for  whom  they  are  acting  in  a 
fiduciary  relation.  Exact  equality  of  benefit  may  be  en- 
joyed, but  the  trustees  are  forbidden  to  protect,  indemnify, 
or  pay  themselves  at  the  expense  of  those  who  are  similarly 
in  relation  to  the  same  fund." 

To  the  same  effect  are  Bradley  v.  Farwell,  i  Holmes, 
433;  Jackson  V.  Ludeling,  21  Wall.  616;  Corbett  v.  Wood- 
ward, 5  Sawyer,  403 ;  Stout  v.  Yaegers  Milling  Co.  3  Fed. 
Rep.  802;  Haywood  v.  Lincoln  Lumber  Co.  64  Wise.  639; 
Richard  v.  New  Hampshire  Insur.  Co.  43  N.  H.  263 ;  San 
Francisco  &  North  Pacif.  R.  R.  Co.  v.  Lee,  48  Cal.  398; 
Gaslight  Improvement  Co.  v.  Terrell,  L.  R.  10  Eq.  168; 
Hopkins's  &  Johnsons  Appeal,  90  Pa.  St.  69.  Of  the  cases 
cited  by  the  defendants,  only  three  fully  sustain  their 
claim  that,  as  creditors  of  the  company,  directors  may, 
in  the  absence  of  fraud,  secure  themselves  for  their  own 
debt,  viz. :  Burr's  Executors  v.  McDonald,  3  Gratt,  206 ; 
Planters'  Bank  of  Farmville  v.  Whittle,  78  Va.  737;  Garrett 
V.  The  Burlington  Plow  Co.  70  Iowa,  697. 

In  the  case  of  Railroad  Co.  v.  Claghorn,  i  Speer  Eq. 
545,  562,  frequently  cited  upon  this  point,  the  mortgage 
in  question  was  not  giyen  to,  nor  was  the  suit  brought 
against,  directors;  neither  did  the  court  find  that  the  com- 
pany was  insolvent  when  the  mortgage  was  given.  The 
case  depended  mainly  on  a  statute.  In  Stratton  v.  Allen, 
16  N.  J.  Eq.  229,  232,  the  court  expressed  no  opinion 
upon  the  point  taken  that  the  defendant  was  a  trustee 
by  virtue  of  his  office  as  director,  but  did  hold  that  he  was 
not  entitled  to  priority,  but  must  share  proportionately 
with  other  creditors.  This  case  also  depended  upon  a 
statute. 

In  Buell  v.  Buckingham,  16  Iowa.  284,  Judge  Cole 
stated  there  was   no  evidence   that   the   company  was   in- 


814         I-RAUD  ON   CREDITORS  OF  CORPORATION 

solvent.  Judge  IJillon  conceded  that  directors  are  trustees 
for  stockholders,  and  treats  the  case  as  a  sale  voidable  be- 
tween trustee  and  cestui  que  trust,  to  which  a  subsequent 
attaching  creditor,  having  no  lien  upon  the  property 
at  the  time,  could  not  make  objection.^  Garret  v.  The  Bur- 
lington Plow  Co.  depended  upon  this  and  other  cases  in 
Iowa  which  had  followed  its  apparent  doctrine.  In  Burr's 
Executors  v.  McDonald,  the  question  was  not  discussed  upon 
prinpiple  or  authority.  In  Planters  Bank  of  Farmville  v. 
Whittle,  the  question  was  elaborately  discussed.  The  cases 
upon  which  the  court  relied  were  Railroad  Co.  v.  Claghorn; 
Stratton  v.  Allen ;  and  Buell  v.  Buckingham,  to  which  we 
have  referred;  also  Ashhurst's  Appeal,  60  Pa.  St.  290, 
which  was  a  suit  by  stockholders,  denied  on  account  of  laches 
and  absence  of  fraud,  the  court  saying:  "Creditors  could 
have  avoided  what  was  done,  but  the  complainants  are  not 
claiming  as  creditors  or  through  creditors."  Smith  v. 
Skcary,  47  Conn.  47,  in  which  the  company  was  supposed 
to  be  solvent  at  the  time  of  the  transaction  complained  of; 
also  Gordon  v.  Preston,  i  Watts,  385 ;  Whit-ujell  v.  Warren, 
20  Vt.  425 ;  and  Sargent  v.  Webster,  13  Met.  497,  in  neither 
of  which  cases  was  this  subject  treated  of  at  length,  or  as 
an  important  element  of  the  case. 

We  think  the  weight  of  recent  authority  regards  direc- 
tors of  an  insolvent  corporation  a.s  trustees  for  creditors, 
and  that  this  authority  stands  upon  the  better  reason.  If, 
as  Judge  Dillon  said,  the  right  to  collect  a  debt  is  "a.  race  of 
diligence,"  open  alike  to  both,  it  must  be  admitted 
that  it  is  a  race  in  which  the  outside  creditor  is 
unduly  handicapped.  The  parties  do  not  contend  upon 
an  equal  footing;  and  although  it  is  said  that 
the  director  has  only  an  advantage  which  results 
from    his    position,    and    which    is    known    to    all     who 

^  Note  by  the  Reporter. —  [See,  on  this  point,  In  re  IVincham  Ship- 
building, &c.,  Co.  Jessel's  Decision,  240;  L  R.  9  Ch.  Div.  322,  328. 

On  the  doctrine  of  the  decision  see  Curran  v.  Arkansas,  15  How. 
U.  S.  304,  311,  and  i  Hare  Amer.  Constit.  Law,  635-637,  text  and  note.] 


OLNEY  c'.  THE  CONANICUT  LAND  CO.  815 

deal  with  the  corporation,  yet  no  one  would  say  that  an 
ordinary  trustee  should  be  entitled  to  an  unequal  start  with 
his  cestui,  by  means  of  information  received  in  the  discharge 
of  his  trust.  If,  then,  the  director  be  a  trustee,  or  one  who 
holds  a  fiduciary  relation  to  the  creditors,  in  case  of  insol- 
vency he  cannot  take  advantage  of  his  position  for  hjs  own 
benefit  to  their  loss.  The  right  of  the  creditor  does  not  de- 
pend upon  fraud  or  no  fraud,  but  upon  the  fiduciary  re- 
lation. *  *  *2 

Our  conclusion  is  that,  in  view  of  the  fiduciar}'  relation 
of  the  directors  to  the  creditors  of  the  company,  they  are 
not  entitled  to  priority  over  the  complainants  by  virtue  of 
their  mortgage.^ 

'The  Court's  discussion  of  certain  facts  claimed  to  exist  by  the 
defendants,  but  which  the  Court  thought  were  not  supported  by  the 
evidence,  is  omitted. 

*For  reference  to  cases  see  note  to  Adams  &  Westlake  Co.  v. 
Dyette,  infra,  p.  828. 


816  FRAUD   OX    CREDITORS   Ol-    CORPORATION 


SANFORD  FORK  AND  TOOL  CO.  v.  HOWE. 

In  the  United  States  Circuit  Court  for  the  District 
OF  Indiana,  and  in  the  Supreme  Court  of  the 
United  States,  1890. 

44  Federal  Reporter,  and  157  United  States  Reports,  312. 

The  San  ford  Fork  and  Tool  Co.  was  organized  in 
1888.  Requiring  money  to  enable  it  to  develop  its  business 
it  gave  notes  aggregating  $69,000,  endorsed  by  six  of  its 
directors  and  stockholders  to  various  persons.  The  money 
from  the  notes  went  into  property  of  the  company. 

At  the  time  these  directors  and  stockholders  indorsed 
these  notes  the  Tool  Company  was  a  going  concern,  in  full 
operation,  with  property  and  means  "amply  sufficient  to  pay 
all  of  its  indebtedness  if  its  property  was  worth  what  it  had 
cost  in  cash."     They  believe  that  such  property  was  worth 
what  it  had  cost  in  cash,  that  the  corporation  was  "solvent 
and    capable    of    becoming    an    independent    and  profitable 
manufacturing  institution  as  soon  as  it  could  win  its  way 
to  a  favorable  market  for  its  manufactured  products."     As 
these  notes  thus  indorsed  began  to  mature  the  directors  found 
that  the  company  was  unable  to  pay  them,  and  required  a 
renewal  or  an  extension.     Thereupon,  on  March  i,   1890, 
they  called  a  special  meeting  of  the  stockholders,  which  was 
held  on  March  15.     At  this  meeting,  out  of  a  total  of  three 
thousand  shares,  two  thousand  two  hundred  and  fifty  were 
represented,  and  a  resolution  was  passed   authorizing  the 
directors  to  execute  a  mortgage  or  mortgages  upon  all  or 
any  part  of  the  property  of  the  corporation,  to  secure  any 
new  indebtedness  that  might  be  incurred,  or  the  renewal  and 
extension  of   any  present   indebtedness  or  liability  of  the 
corporation.      On  March    17   the  mortgage   was   executed, 
though  it  was  not  recorded  until  May  i,  1890.     The  direc- 
tors  and   stockholders   who   were   endorsees    then   paid   or 


SANFORD  FORK  AND  TOOL  CO.  v.  HOWE  817 

procured  renewals  of  the  several  notes,  and  in  addition  two 
of  them  endorsed  and  subsequently  paid  other  paper  of  the 
company  to  the  amount  of  $6,000.  On  May  13,  1890,  the 
company  failed  and  its  property  passed  to  John  W.  Davis, 
as  receiver.  At  the  date  of  the  execution  of  this  mortgage 
the  Tool  Company  was  indebted  in  the  sum  of  two  hundred 
and  seventy-five  thousand  dollars.  The  value  of  its  pro- 
perty at  that  tirne  does  not  appear,  but  after  the  appoint- 
ment of  a  receiver  it  was  appraised,  the  manufacturing 
plant — the  property  described  in  the  trust  deed  and  mort- 
gage— being  appraised  at  $116,055.39;  the  other  and  un- 
encumbered property  at  $88,390.85. 

This  was  a  suit  by  the  creditors  of  the  companv  to 
set  aside  the  mortgage.     The  defendants  demurred.^ 

Woods,  District  Judge.-  The  complainants  are  shown 
to  be  general  creditors  of  the  company,  with  claims 
which,  as  allowed  by  the  Vigo  circuit  court,  amount 
to  $11,631.39;  and  they  dispute  the  validity  of 
the  mortgage  for  the  indemnity  of  the  respondents 
on  the  ground  that  the  directors  of  the  company  had  no  right 
to  obtain  a  preference  for  themselves  over  other  creditors. 
It  is  not  alleged,  nor  was  it  claimed  in  argument,  that  the 
respondents,  or  any  of  them,  did  anything  with  an  actual 
intent  to  defraud.  The  question  whether  or  not  an  insolvent 
corporation  which  had  not  suspended  business  could  prefer 
its  directors  or  managing  agents,  who  were  its  creditors,  or 
liable  as  indorsers  of  its  paper,  was  considered  upon  full 
argument  and  citation  of  authorities  pro  and  con  in  the  case 
of  Lipincott  v.  Carriage  Co.,  25  Fed.  Rep.  577,  586,  and 
the  conclusion  was  reached  that  the  weight  of  authority 
and  reason  was  against  the  validity  of  such  preferences. 
The  theory  upon  which  that  conclusion  was  based  is  shown 
in  the  following  extract  from  the  opinion : 

"For  while  it  is  generally  conceded  that  a  corporation, 

*  The  facts  are  restated. 

'  His  reference  to  the  facts  is  omitted. 


818         FRAUD   ON   CREDITORS  OF  CORPORATION 

notwithstanding  insolvency,  continues  possessed  [while  a 
going  concern]  of  a  general  power  of  management  of  its 
affairs,  and,  like  natural  persons,  may  give  preferences  by 
way  of  payment  or  security  to  one  creditor  or  class  of  credi- 
tors over  others,  yet  in  close  analogy  to  the  rule  which  for- 
bids the  giving  of  preferences  by  individual  debtors,  for  the 
purpose  of  securing,  or  in  such  manner  as  to  secure,  advan- 
tage or  benefit  to  themselves,  and  in  manifest  accord  with 
the  tendency  of  judicial  opinion,  as  expressed  upon  con- 
sideration of  kindred  questions,  it  has  been  decided  in  a 
number  of  cases  that  perferences  given  by  insolvent  corpora- 
tions, in  such  manner  as  to  be  of  special  benefit  to  the  direc- 
tors or  managing  agents,  or  any  of  them,  will  be  set  aside. 
Indeed,  it  has  been  often  said  by  judges,  includng  those  of 
the  federal  supreme  court,  that  the  property  of  an  insolvent 
corporation  is  a  trust  fund,  and  the  directors  trustees  for 
the  creditors;  and,  if  this  were  strictly  so,  it  is  manifest  that 
no  preferences  could  be  allowed  between  creditors  standing 
in  the  same  relation  to  the  fund.  These  statements  are, 
however,  true  in  a  qualified  sense,  and  lead  logically,  if  not 
necessarily,  to  the  conclusion  that  in  such  cases,  if  they  give 
preferences,  they  must  do  it  unbiased  by  considerations  of 
personal  advantage  or  gain." 

That  ruling  has  the  support  of  a  number  of  later  de- 
cisions, in  some  of  which  it  is  expressly  approved :  White, 
etc.,  Mamifg  Co.  v.  Pettes  Importing  Co.,  30  Fed.  Rep. 
864 ;  Adams  v.  Milling  Co.,  35  Fed.  Rep.  433 ;  Beach  v. 
Miller,  (111.)  22  N.  E.  Rep.  464;  Haywood  v.  Lumber  Co., 
64  Wis.  639,  26  N.  W.  Rep.  i^^;  Olney  v.  Land  Co.,  16 
R.  I.  361,  18  Atl.  Rep.  181  ;  Rouse  v.  Bank,  (Ohio,)  22  N. 
E.  Rep.  293.  See,  also,  Hope  v.  Salt  Co.,  25  W.  Va.  789: 
Gillet  V.  Moody,  3  N.  Y.  479.  On  the  contrary,  the  supreme 
court  of  Iowa,  in  the  recent  case  of  Garrett  v.  Plow  Co.,  70 
Iowa.  697,  29  N.  W.  Rep.  395,  has  declared  such  pref- 
erences valid  if  fairly  given,  and  in  support  of  that  view 
counsel  for  the  respondents  have  referred  to  the  followin^^ 


SANFORD  FORK  AND  TOOL  CO.  v.  HOWE  819 

cases,  not  cited  in  Lippincott  v.  Carriage  Co.,  supra:  Strat- 
ton  V.  Allen,  i6  N.  J.  Eq.  229;  Wilkinson  v.  Bauerle,  41 
N.  J.  Eq.  635,  7  Atl.  Rep.  514;  Railroad  Co.  v.  Dewey,  14 
Mich.  477. 

It  is  not  to  be  overlooked  that  some  of  the  later  deci- 
sions which  deny  the  validity  of  preferences  in  favor  of 
directors  proceed  upon  the  theory  that  the  directors  of  an 
insolvent  corporation,  even  before  a  suspension  of  business, 
are  trustees  for  the  creditors,  and,  if  that  theory  is  essential 
to  the  conclusion,  the  question  is  perhaps  already  foreclosed 
in  the  federal  courts ;  because,  in  Purifier  Co.  v.  McGroarty, 
136  U.  S.  241,  10  Sup.  Ct.  Rep.  10 1 7,  the  supreme  court 
has  said  that  the  decision  in  Rouse  v.  Bank,  supra,  "pro- 
ceeded in  part  upon  a  theor}-  that  the  property  of  an  insol- 
vent corporation  is  a  trust  fund  for  its  creditors  in  a  wider 
and  more  general  sense  than  could  be  maintained  upon  gen- 
eral principles  of  equity  jurisprudence."  But  I  do  not  think 
that  theory  indispensable.  It  seems  to  me  enough  to  say 
that  a  sound  public  policy  and  a  sense  of  common  fairness 
forbid  that  the  directors  or  managing  agents  of  a  business 
corporation,  when  disaster  has  befallen  or  threatens  the  en- 
terprise, shall  be  permitted  to  convert  their  powers  of  man- 
agement and  their  intimate,  and  it  may  be,  exclusive,  know- 
ledge of  the  corporate  affairs  into  means  of  self -protection 
to  the  harm  of  other  creditors.  They  ought  not  to  be  com- 
petitors in  a  contest  of  which  they  must  be  the  judges.  The 
necessity  for  this  limitation  upon  the  right  to  give  pref- 
erences among  creditors  when  asserted  by  corporations  may 
not  have  been  perceived  in  earlier  times,  but  the  growing 
importance  and  variety  of  modern  corporate  enterprises  and 
interests  I  think  will  compel  its  recognition  and  adoption. 
The  fact  in  this  case  that  the  stockholders  authorized  the 
making  of  the  mortgage  seems  to  be  immaterial.  That  ac- 
tion was,  it  is  averred,  procured  by  the  directors  proposed 
to  be  benefited,  they,  themselves,  being  stockholders;  and, 
even  if  this  were  not  averred,  the  case  would  not,  I  think, 


820         FRAUD   ON   CREDITORS  OF  CORPORATION 

be  essentially  different.  Whether  or  not  such  preferences 
are  fairly  given  is  an  impracticable  inquiry,  because  there 
can  be  in  ordinary  cases  no  means  of  discovering  the  truth ; 
and  consequently  the  presumption  to  the  contrary  should  in 
every  case  be  conclusive.  Concede  that  it  is  a  question  of 
proof,  and  that  a  preference  in  favor  of  a  director  will  be 
deemed  valid  if  fairly  given,  and  it  may  as  well  be  declared  to 
be  a  part  of  the  law  of  corporations  that  incases  of  insolvency 
debts  to  directors  and  liabilities  in  which  they  have  a  special 
interest  must  be  first  discharged.  That  will  be  the  practical 
effect,  and  the  examples  will  multiply  of  individual  enter- 
prises prosecuted  under  the  guise  of  corporate  organization, 
for  the  purpose,  not  only  of  escaping  the  ordinary  risks  of 
business  done  in  the  owner's  name,  which  may  be  legitimate 
enough,  but  of  enabling  the  promoters  and  managers,  when 
failure  comes,  to  appropriate  the  remains  of  the  wreck  by 
declaring  themselves  favored  creditors.  Besides  incon- 
sistency with  that  equality  which  Equity  loves,  such  favors 
involve  too  many  possibilities  of  dishonesty  and  successful 
fraud  to  be  tolerated  in  an  enlightened  system  of  jurispru- 
dence. 

The  demurrer  is  overruled. 

The  defendant  appealed. 

Mr.  Justice  Brewer  :  In  the  absence  of  any  testimony, 
and  in  the  manner  in  which  this  case  was  submitted  for  deci- 
sion, it  must  be  assumed  that  the  matters  alleged  in  the  bill 
and  not  denied  in  the  answer  and  the  new  matters  set  forth 
in  the  answer  are  true.  And  the  question  which  arises  is 
whether,  upon  these  admitted  facts,  the  decree  in  favor  of  the 
plaintiffs  can  be  sustained. 

The  manufacturing  business  in  which  the  corporation 
was  engaged  was  a  new  enterprise.  It  had  been  carried  on 
for  only  about  eighteen  months.  In  that  business  had  been 
invested  nearly  $300,000,  and  the  property  possessed  by  the 
corporation  was  at  its  cost  price  equal  to  the  entire  indebted- 
ness.    It  thus  appears  that  there  had  been  no  waste,  mis- 


.  SANFORD  FORK  AND  TOOL  CO.  v.  HOWE  821 

management,  or  loss.  Not  a  dollar  of  the  indebtedness  was 
held  by  any  director  or  stockholder,  but  the  personal  credit 
of  the  six  directors  and  stockholders  had  been  loaned  to  the/ 
company  to  the  extent  of  $69,000.  The  corporation  was 
still  a  going  concern.  There  was  no  purpose  of  abandoning 
the  business.  The  indorsers  believed  that  if  the  corpora- 
tion could  be  tided  over  its  temporary  embarrassment  it 
could  be  made  successful.  The  stockholders  authorized  the 
mortgage.  It  was  given  only  upon  part  of  the  property,  and 
that  part  already  encumbered  by  a  fifty  thousand  dollar  trust 
deed.  The  value  of  this  property  was,  according  to  the  sub- 
sequent appraisement,  much  below  the  sums  secured  by  the 
trust  deed  and  the  mortgage.  In  addition  the  corporation 
had  nearly  $90,000  of  unencumbered  property  to  apply 
in  satisfaction  of  the  claims  of  its  creditors.  The  mort- 
gage was  not  given  simply  as  security  for  a  past  indebted- 
ness, but  to  induce  the  indorsers  to  obtain  for  the  corpora- 
tion a  renewal  or  extention  of  its  obligations,  and  to  make 
further  indorsements.  In  reliance  upon  this  mortgage  the 
indorsers  secured  renewals  or  extensons,  or  themselves  took 
up  the  notes  they  had  indorsed,  and  at  the  same  time  lent  the 
credit  of  their  names  to  new  paper  of  the  company.  Thus 
they  prevented  a  suspension  of  the  business  and  enabled  the 
corporation  to  continue  its  operations,  and  did  so  believing 
that  by  such  continuance  the  corporation  would  be 
enabled  to  work  itself  out  of  its  temporary  difficulties.  All 
this  was  done  in  the  utmost  good  faith. 

Under  these  circumstances,  should  the  transaction  be 
condemned  and  the  mortgage  held  void  as  against  creditors? 
This  question,  we  think,  must  be  answered  in  the  negative. 
It  is  said  that  the  directors  of  a  corporation  stand  m  a  fidu- 
ciary relation  to  both  the  stockholders  and  the  creditors. 
Whatever  may  be  the  extent  of  the  fiduciary  obligations  of 
directors  to  stockholders,  there  can  be  no  pretence  in  this 
case  of  a  breach  thereof.  The  mortgage  was  expressl}^  au- 
thorized by  the  stockholders,   and  they  cannot  claim  tliat 


822  FRAUD  ON  CREDITORS  OF  CORPORATION 

the  directors  in  executing  the  instrument,  which  they  had 
themselves  authorized,  were  guilty  of  any  breach  of  duty 
to  them.  It  is  often  said  that  the  directors  may  not  take 
advantage  of  their  position  and  power  to  secure  personal 
advantage  to  themselves,  but  that  proposition  has  no  applica- 
tion here,  for  the  corporation  itself  directed  this  mortgage. 
It  was  an  application  by  the  debtor  of  its  property  to  secure 
certain  of  its  creditors,  and  not  the  act  of  the  agents  of  a 
debtor  to  protect  themselves.  The  case  involves  no  breach 
of  trust  on  the  part  of  the  agent  towards  the  principal,  but 
more  closely  resembles  the  case  of  an  individual  debtor  giv- 
ing preferences  to  certain  of  his  friends,  and  the  general  rule 
is  that,  in  the  absence  of  statute,  a  debtor  has  such  jus 
disponendi  in  respect  to  his  property  that,  although  insolvent 
and  contemplating  a  cessation  of  business  and  the  surrender 
of  his  property  to  his  creditors,  he  may  lawfully  prefer 
certain  of  them,  even  though  thereby  others  receive  no  pay- 
ment. 

But.  passing  from  the  relations  of  directors  to  the  cor- 
poration and  its  stockholders,  it  is  one  of  the  vexed  questions 
of  the  law  as  to  how  far  the  duty  of  a  corporation  and  its 
directors  to  creditors  interferes  with  the  otherwise  con- 
ceded power  of  a  debtor  to  prefer  certain  of  his  creditors. 
Into  a  discussion  of  this  question  in  its  length  and  breadth 
we  deem  it  unnecessary  now  to  enter,  for  the  facts  of  this 
case  remove  many  of  the  embarrassments  that  often  attend 
such  questions.  This  is  not  like  the  case  of  Sutton  Manu- 
facturing Co.  V.  Hutchinson,  63  Fed.  Rep.  496,  decided 
by  the  United  States  Court  of  Appeals  for  the  Seventh 
Circuit,  in  which  the  directors  of  a  corporation,  insolvent 
and  intending  to  discontinue  business,  gave  a  mortgage  to 
secure  certain  of  their  number  who  happened  to  be  creditors, 
and  thus  attempted  to  secure  a  preference  in  behalf  of  them- 
selves. Nor  is  it  the  case  of  the  directors  of  a  corporation 
in  fact  insolvent,  though  continuing  and  expecting  to  con- 
tinue in  business,  executing  a  mortgage  on  the  proper.ty  .of 


SANFORD   FORK   AND  TOOL  CO.  v.  HOWE  823 

the  corporation  to  simply  secure  themselves  for  a  past  in- 
debtedness; for  here  the  corporation,  although  insolvent 
within  the  rule  which  declares  that  insolvency  exists  when 
a  debtor  has  not  property  sufficient  to  pay  his  debts,  was  still 
a  going  concern  and  intending  to  continue  its  business,  and 
the  mortgage  was  executed  not  simply  to  secure  directors 
and  stockholders  for  past  indebtedness  but  to  induce  them 
to  procure  a  renewal  or  extension  of  paper  of  the  company 
then  maturing  or  about  to  mature,  and  also  to  obtain  further 
advances  of  credit. 

Will  it  be  doubted  that,  if  this  mortgage  had  been  given 
directly  to  the  holders  of  these  notes,  it  would  have  been 
valid?  Are  creditors  who  are  neither  stockholders  nor  di- 
rectors, but  strangers  to  a  corporation,  disabled  from  taking 
security  from  the  corporation  by  reason  of  the  fact  that  upon 
the  paper  they  hold  there  is  also  the  indorsement  of  certain 
of  the  directors  or  stockholders?  Must,  as  a  matter  of  law, 
such  creditors  be  content  to  share  equally  with  the  other 
creditors  of  the  corporation,  because,  forsooth,  they  have 
also  the  guarantee  of  some  of  the  directors  or  stockholders, 
whose  guarantee  may  or  may  not  be  worth  anything? 

But  even  that  is  not  this  case,  for  here  the  corporation 
was.  a  going  concern  and  intending  to  continue  in  business, 
and  the  mortgage  was  given  with  a  view  of  enabling  it  to 
so  continue,  and  to  prevent  creditors  whose  debts  were  ma- 
turing from  invoking  the  aid  of  the  courts  to  put  a  stop 
thereto.  Can  it  be  that,  if  at  any  given  time  in  the  history 
of  a  corporation  engaged  in  business,  the  market  value  of  its 
property  is  in  fact  less  than  the  amount  of  its  indebtedness, 
the  directors,  no  matter  what  they  believe  as  to  such  value, 
or  what  their  expectations  as  to  the  success  of  the  business,. 
act  at  their  own  peril  in  taking  to  themselves  indemnity  for 
the  further  use  of  their  credit  in  behalf  of  the  corporation? 
Is  it  a  duty  resting  upon  them  to  immediately  stop  business 
and  close  up  the  affairs  of  the  corporation?  Surely,  a  doc- 
trine like  that  would  stand  in  the  way  of  the  development 


824 


FRAUD  ON  CREDITORS  OF  CORPORATION 


of  almost  any  new  enterprise.  It  is  a  familiar  fact  that  in 
the  early  days  of  any  manufacturing  establishment,  and  be- 
fore its  business  has  become  fully  developed,  the  value  of 
the  plant  is  less  than  the  amount  of  money  which  it  has 
cost,  and  if  the  directors  cannot  indemnify  themselves  for 
the  continued  use  of  their  personal  credit  for  the  benefit 
of  the  corporation,  many  such  enterprises  must  stop  in  their 
very  beginning. 

It  is  worthy  of  note,  too,  that  these  directors  placed  the 
encumbrance  not  on  the  entire  property  of  the  corporation, 
but  only  upon  that  part  which  ordinarily  shows  the  greatest 
difference  between  value  and  cost,  to  wit,  the  building  and 
the  machiner}' — property,  too,  which  was  already  encum- 
bered for  a  large  sum,  leaving  free  all  the  unencumbered 
property  of  the  corporation  to  answer  to  the  claims  of 
creditors. 

Of  course,  an  underlying  fact,  expressly  stated  to  have 
existed  in  these  transactions,  is  good  faith.  Carrying  on 
business  after  the  giving  of  an  indemnifying  mortgage,  with 
a  knowledge  of  insolvency,  with  the  expectation  of  soon 
winding  up  the  affairs  of  the  corporation,  and  only  for  the 
sake  of  giving  an  appearance  of  good  faith,  leaves  the  trans- 
action precisely  as  though  the  mortgage  was  executed  at 
the  moment  of  distribution,  and  with  the  view  of  a  personal 
preference. 

Again,  not  only  was  the  corporation  a  going  concern, 
not  only  did  the  directors  expect  and  intend  that  it  should 
continue,  and  believe  that  its  continuance  would  bring  finan- 
cial success,  but,  as  appears,  they  did  continue  the  business 
for  two  months,  and  during  that  time  paid  out  in  the 
ordinary  management  of  its  affairs  and  in  discharge  of  its 
debts  over  $30,000.  without  appropriating  a  single  dollar 
to  the  payment  of  the  claims  for  the  indorsement  of  whicli 
they  had  taken  this  indemnity. 

We  are  of  opinion  that  these  facts  clearly  and  fully  dis- 
tinguish this  case  from  many  which  have  been  cited,  in  which 


SANFORD  FORK  AND  TOOL  CO.  v.  HOWE  825 

the  action  of  the  directors  of  a  corporation  in  securing  to 
themselves  preferences  in  the  hour  of  its  extremities  has 
been  adjudged  void,  and  that  it  is  going  too  far  to  hold 
that  a  corporation  may  not  give  a  mortgage  to  its  directors 
who  have  lent  their  credit  to  it,  to  induce  a  continuance  of 
the  loan  of  that  credit,  and  obtain  renewals  of  maturing 
paper  at  a  time  when  the  corporation,  though  not  in  fact 
possessed  of  assets  equal  to  its  indebtedness,  is  a  going 
concern,  and  is  intending  and  expecting  to  continue  in  busi- 
ness. We  are,  therefore,  of  opinion  that  the  Circuit  Court 
erred,  and  the  decree  will  be 

Reversed  and  the  case  remanded  for  further  proceed- 
ings not  inconsistent  with  this  opinion.^ 


*  Compare:  Corey  v.  Wadsworth,  99  Ala  68,  1891.  (Stone,  C.  J., 
having  set  forth  that  the  directors  of  an  insolvent  corporation  cannot 
prefer  themselves  as  creditors,  said :  "At  what  stage  of  a  corporation's 
affairs  must  it  be  pronounced  insolvent,  so  as  to  bring  it  within  the 
principle  we  have  declared?  Tt  is  not  enough  that  its  assets  are  insuffi- 
cient to  meet  all  its  liabilities,  if  it  be  still  prosecuting  its  line  of  busi- 
ness, with  the  prospect  and  expectation  of  continuing  to  do  so.  In 
other  words,  if  it  be,  in  good  faith,  what  is  sometimes  called  a  going 
business  or  establishment.  Alany  successful  corporate  enterprises,  it 
its  believed,  have  passed  through  crises,  when  their  property  and 
effects,  if  brought  to  present  sale,  would  not  have  discharged  all  their 
liabilities  in  full.  We  feel  safe  in  declaring  that  when  a  corporation's 
assets  are  insufficient  for  the  payment  of  its  debts,  and  it  has  ceased 
to  do  business,  or  has  taken,  or  is  in  the  act  of  taking,  a  step  which 
will  practically  incapacitate  it  for  conducting  the  corporate  enterprise 
with  reasonable  prospect  of  success,  or  its  embarrassments  are  such 
that  early  suspension  and  failure  must  ensue,  then  such  corporation 
must  be  pronounced  insolvent." 

West  v.  Hanson  Produc;  Co.,  6  Colo.  App.  467,  1895.  (B,  C  and 
D  were  directors  of  the  A  Company.  The  A  Company  desired  to  raise 
money  on  its  notes  at  a  certain  Bank.  The  Bank  refused  to  take  the 
notes  unless  they  w-ere  endorsed  by  B,  C  and  D,  which  was  done.  The 
A  Company,  not  being  able  to  pay  the  notes  at  maturity,  assigned  all  its 
property  to  T  in  trust  to  sell  the  same,  and  pay  the  proceeds  to  the 
Bank  on  account  of  the  debt  on  the  notes.  P,  a  creditor  of  the  A  Com- 
pany, began  garnishee  proceedings  against  T.  Judgr^ent  for  P  reversed 
on  appeal.  Reed,  P.  J. :  "After  having  stipulated  'that  the  money 
was  borrowed  by  the  company  and  these  parties  became  security  for  it,' 
counsel  for  appellee,  in  argument,  fall  into  error  by  regarding  the  debt 
as  that  of  the  indorsers  or  sureties.  They  say,  'But  we  fail  to  find  in 
appellant's  brief  authorities  sustaining  preferences  made  by  directors 
of  an  insolvent  corporation  in  favor  of  themselves.'  Again,  'Any 
attempt  on  the  part  of  the  directors  of  an  insolvent  corporation  to  pre- 
fer themselves  is  a  fraud  upon  the  creditors.'  This  mistaken  theory 
of  the  case  is  ably  argued  at  length,  and  authorities  are  cited  sup- 
posed to   favor  the  contention,  but  the  question  is  not  involved.     The 


826  FRAUD  ON  CREDITORS  OF  CORPORATION 

fact  that  they  were  sureties  for  the  payment  of  the  debt  and  made 
the  note — and  although  the  payment  of  the  note  would  relieve 
them  of  their  liability  and  may  have  prompted  them  to  prefer  the  bank, 
— the  debt  remained  the  debt  of  the  corporation  and  did  not  become 
that  of  the  individual  officers.  The  great  weight  of  modern  authority 
is  to  the  effect  that,  as  individuals,  the  officers  of  a  corporation  can 
loan  it  money,  or  legally,  in  any  other  proper  way,  become  its  creditors 
and  deal  with  it  in  the  same  manner  as  with  an  outsider.  If  such  is 
the  law, — and  it  seems  to  be  where  there  is  no  statutory  prohibition, — 
it  logically  follows  that  the  right  to  become  a  creditor  carries  with  it 
all  the  rights  of  a  creditor,  and  authorizes  the  corporation  to  prefer 
the  officer  if  it  sees  fit." 

Milledgeville  Banking  Co.  v.  Mclntyre  Store,  98  Ga.  503,  1896. 
(Lumpkin,  J.,  having  announced  the  principle  that  the  directors  of  in- 
solvent corporation,  while  they  could  prefer  certain  creditors,  could  not, 
being  creditors  prefer  themselves,  said :  "We  think  the  mortgage  in 
favor  of  Waxelbaum  &  Sons  stands  upon  as  good  a  footing  as  does  that 
executed  in  favor  of  the  Banking  Company.  It  is  true  that  the  direc- 
tors, or  some  of  them,  had  given  to  Waxelbaum  &  Sons  a  joint  promis- 
sory note,  binding  upon  each  individually,  as  collateral  security  for  the 
payment  of  the  debt  incurred  by  the  corporation ;  but  if  Waxelbaum  & 
Sons  became  dissatisfied  with  the  security  thus  given  them,  we  see  no 
reason  why  they  could  not  very  properly  request  that  their  claim  be 
secured  by  mortgage,  or  why,  upon  getting  the  same,  they  are  not 
entitled  to  hold  it  and  reap  the  benefit  to  be  derived  from  it.  They 
certainly  thereby  gained  no  advantage  over  the  complaining  creditors 
other  than  the  law  expressly  allows ;  and  having  kept  strictly  within 
the  bounds  of  their  legal  rights  in  securing  their  preference,  even  a 
court  exercising  equitable  jurisdiction  has  no  power  to  restrain  them 
from  enforcing  their  mortgage,  or  to  declare  the  same  inoperative  or 
void  in  their  hands  as  against  unsecured  creditors.") 

Mueller  v.  Fire  Clay  Co.,  183  Pa.  450,  1898.  (The  A  Company  gave 
notes  to  a  Bank,  the  directors  of  the  Company  becoming  endorsees. 
The  Company  not  having  the  ready  money  to  pay  the  Bank,  the  liank 
insisted  that  the  Company  confess  judgment  to  the  directors  in  trust 
for  the  Bank.  Held,  that  even  if  the  Company  was  insolvent  at  the 
time  of  the  judgment,  the  judgment  was  not  fraudulent  because  of  the 
interest  of  the  directors  as  endorsees.) 

In  some  jurisdictions  preferences  to  directors  and  stockholders  are 
allowed.  See,  Warfield  v.  Marshall  County  Canning  Co.,  72  Iowa  666, 
1887.  (A  Company,  needing  money,  borrowed  on  notes  given  or  en- 
closed by  some  of  its  stockholders.  The  Company,  being  unable  to  pay 
the  notes  by  a  vote  of  its  stockholders  gave  a  mortgage  to  the  stock- 
holders, who  were  creditors,  and  then  assigned  all  the  property  of  the 
Company  to  a  new  Company  formed  by  the  shareholders  of  the  first 
Company  and  other  persons,  the  consideration  being  the  agreement  of 
the  second  Company  to  pay  the  mortgage,  which  was  full  value  for  the 
property  assigned.  Held,  that  the  creditors  of  the  first  Company  could 
not  impeach  the  transaction,  though  it  was  with  the  knowledge  of  all 
parties  that  the  other  creditors  of  the  first  Company  would  never 
realize  anything  on  their  claims.) 

Compare:  Sells  v.  Rosedale  Grocery  and  Commission  Co.,  72 
Miss.  590,  1895.  (The  stockholders  of  the  A  Company  and  the  B 
stockholders,  were  in  large  part,  but  not  entirely  identical.  The  A 
Company  was  a  creditor  of  the  B  Company.  The  B  Company  was 
insolvent.  Held,  that  the  B  Company  could  prefer  the  A  Company 
to  its  other  creditors.) 

In  Buell  v.  Buckingham,  16  Iowa  284,  291,  Judge  Dillon  said:  "Be- 
ing an  officer  of  the  corporation  did  not  deprive  Buell  of  the  right  to 


SANFORD  FORK  AND  TOOL  CO.  v.  HOWE  827 

enter  into  competition  with  other  creditors  and  run  a  race  of  vigilance 
with  them,  availing  himself  in  the  contest  of  his  superior  knowledge 
and  of  the  advantage  of  his  position,  to  obtain  security  for,  'or  payment 
of,  his  debt." 

The  position  that  directors  being  creditors  of  the  corporation  have 
power  to  give  themselves  preferences,  but  that  tlie  burden  is  on  the 
directors  in  such  cases  to  show  that  they  had  a  bona  fide  debt  against 
the  corporation  is  taken  in  Schufeldt  v.  Smith,  131  Mo.  280,  1895.  See, 
to  the  same  effect,  the  opinion  of  Judge  Taft  in  Brown  v.  Grand 
Rapids  Co.,  58  Fed.  286,  1893,  292.  See  also  the  opinion  in  Levering 
v.  Biincl,  146  Ind.  545,  1897.  In  this  case,  however,  the  vote  -of  the 
director  for  his  own  preference  was  not  necessary  to  carry  the  resolu- 
tion.    Query,  whether  this  fact  is  of  any  importance? 

It  is  suggested  that  the  student  discuss  whether  the  law  should  or 
should  not  discriminate  between  preferences  to  directors  and  prefer- 
ences to  stockholders. 


828  FRAUD  ON  CREDITORS  OF  CORPORATION 


ADAMS  AND  WESTLAKE  CO.  v.  DEYETTE. 
In  the  Supreme  Court  of  South  Dakota,  1895. 

S  South  Dakota  Reports,  iig. 

On  the  9th  day  of  May,  1888,  the  Hicks-Trask  Hard- 
ware Co.,  a  corporation,  being  insolvent,  confessed  judgment 
against  itself  in  favor  of  each  of  the  defendants  C.  E.  Deyette 
and  W.  W.  Lewis,  amounting  to  $1,469.26;  the  Deyette 
judgment  being  for  $649.84,  and  the  Lewis  judgment  for 
$819.42.  After  entry  of  the  above  judgments,  and  on  the 
1 2th  day  of  the  same  month,  said  defendant  confessed 
numerous  other  judgments,  among  which  there  was  one  in 
plaintiff's  favor  for  $1,319.47.  Executions  issued  in  suc- 
cession, and  the  property  of  the  defendant  corporation  was 
levied  upon  in  the  order  above  indicated,  and  in  the  order 
in  which  the  respective  judgments  were  entered  and  dock- 
eted; and  the  property  of  the  corporation  was  found 
to  be  insufficient  to  satisfy  the  judgments  which  preceded 
that  of  the  plaintiff.  The  referee  made,  among  others,  the 
following  findings  of  fact:  (14)  That  the  consideration  of 
the  confession  of  judgment  in  favor  of  Charles  E.  Deyette 
was  as  follows:  $514.60,  money  loaned  to  the  Hicks-Trask 
Hardware  Company  on  January  20,  1888,  was  borrowed 
by  said  company  for  the  purpose  of  using  the  same  to  pur- 
chase the  stock  of  said  company  held  by  Trask,  and  on  ac- 
count of  the  indebtedness  of  $134.22,  owing  to  said  Deyette 
by  said  corporation  for  work  and  labor  done  by  said  Deyette 
for  said  corporation.  (15)  That  the  defendant  Deyette  had 
actual  knowledge  of  the  purpose  and  intent  of  the  said  cor- 
poration to  use  the  same  in  the  purchase  of  stock.  (16) 
That  the  consideration  of  the  judgment  of  the  defendant 
Lewis  was  $514.60,  money  loaned  to  the  said  corporation 
by  him  about  January  20,  1888,  and  borrowed  by  said  com- 
pany for  the  purpose  of  using  the  same  in  the  purchase  of 


ADAMS  AND  WESTLAKE   CO.  v.  DEYETTE  829 

Stock  of  said  corporation  held  by  Trask;  and  the  sum  of 
$304.07,  due  Lewis  from  said  corporation  on  account  of 
services  rendered  by  Lewis  to  said  corporation.  (17)  That 
defendant  knew  of  the  purpose  and  intent  for  which  said 
money  was  borrowed  by  said  corporation.  (18)  That  the 
defendant  Lewis,  at  the  time  of  and  prior  to  the  making  of 
said  confession  of  judgment  to  himself,  was  a  director  of 
said  corporation,  and  secretary  thereof,  and  signed  said  con- 
fessions as  secretary  on  behalf  of  said  corporation.  (19) 
That  the  defendant  Deyette,  at  the  time  of  said  confessions 
of  judgment  by  said  corporation  to  himself,  was  not  a  di- 
rector. (20)  That  no  written  consent  of  the  stockholders 
of  the  Hicks-Trask  Hardware  Company  was  ever  had  to  the 
purchase  of  stock  from  Trask  by  said  corporation.  (21) 
That  on  May  12,  1888,  executions  were  issued  from  the 
District  Court  upon  the  said  judgment  of  said  plaintiff  to 
the  sheriff'  of  Brown  county,  in  which  said  defendants  the 
Hicks-Trask  Hardware  Company  had  its  place  of  business. 
(22)  That  executions  issued  from  the  clerk  of  the  District 
Court  of  Brown  County  on  each  of  the  judgments  of  the 
defendants  Foster,  Deyette  and  Lewis,  and  were  by  him 
levied  on  the  personal  property  of  the  Hicks-Trask  Hard- 
ware Company,  and  all  thereof ;  and  the  said  sheriff  sold 
the  same,  and  holds  the  money  realized  from  said  sale,  to 
be  applied  on  said  executions  according  to  the  decree  of  this 
court,  (23)  That  the  proceeds  arising  from  said  sale  are 
not  sufficient  to  pay  the  judgments  against  the  Hicks-Trask 
Hardware  Company  prior  to  the  judgment  of  plaintiff. 
Upon  these  findings  of  fact  the  following  conclusions  of  law 
were  based :  (2)  That  the  judgment  of  the  defendant  Dey- 
ette, as  to  the  sum  of  $514.60,  money  loaned  to  the  said 
corporation  for  the  purpose  of  purchasing  stock,  is  invalid, 
for  the  reason  the  Hicks-Trask  Hardware  Company,  and  the 
officers  thereof  had  no  power  to  borrow  money  for  the  pur- 
chase of  its  stock;  and  the  defendant  having  loaned  said 
money  knowing  of  the  illegal  purpose  for  which  it  was  to  be 


83U  FRAUD  OX  CREDITORS  OF  CORPORATION 

used,  cannot  recover  the  same  from  said  corporation.  (3) 
That  as  to  the  sum  of  $134.25,  included  in  the  judgment  of 
said  Deyette,  the  same  is  vahd,  and  should  stand,  and  be  en- 
forced for  said  sum  of  $134.25.  (4)  That  judgment  of  the 
defendant  Lewis  is  invalid  for  the  reason  that  the  confession 
of  the  same,  made  by  him  and  obtained  by  him  when  he  was 
a  director  of  said  corporation,  was  an  illegal  preference  as 
against  the  creditors  of  said  corporation,  and  that  the  relief 
prayed  by  plaintiff  should  be  granted  as  against  said 
Lewis.  (5)1  further  find  as  to  the  judgment  of  the  defend- 
ant Lewis  that  as  to  the  sum  of  $514.60  it  is  invalid  for  the 
reason  that,  as  to  said  amount,  the  consideration  was  for 
money  loaned  to  said  corporation  by  Lewis  for  the  illegal 
purpose  of  purchasing  stock  of  said  corporation.  Judgment 
by  the  court  was  accordingly  entered  on  motion  of  plaintiff's 
counsel  and  defendants  Deyette  and  Lewis  appeal  therefrom. 

The  Court,  per  Fuller,  J .,  affirmed  their  previous  de- 
cision confirming  the  judgment  of  the  trial  Court. ^ 

Kellam^  /.,  dissenting.-  In  our  former  opinion,  now 
adhered  to  by  a  majority  of  the  court,  we  went  further,  and 
said  that  the  judgment  ought  not  to  be  enforced,  because  it 
was  an  efl:ort  on  the  part  of  an  insolvent  corporation  to  pre- 
fer Deyette  as  a  creditor,  and  that  an  insolvent  corporation 
could  not  do  this.  The  same  cause  and  the  same  reason 
would  condemn  the  entire  judgment,  as  well  for  services  as 
for  money  loaned;  but  upon  further  reflection  and  a  more 
thorough  examination  of  the  question  I  am  unable  to  con- 
cur in  the  opinion  that  a  corporation,  by  becoming  insolvent 
merely,  ipso  facto  loses  its  right  to  pay  or  secure  one  cred- 
itor in  preference  to  another.     We  have  declared  the  right 

^The  opinion  confirms  at  length  the  reasons  for  the  conclusions 
set  forth  by  the  trial  Judge,  supra.  The  greater  part  of  the  opinion 
discusses  the  right  of  a  corporation  to  purchase  its  own  stock,  a  ques- 
tion which  the  editors  have  made  the  subject  of  a  separate  chapter. 
See  infra. 

'  Only  so  much  of  the  opinion  is  reprinted  as  relates  to  the  ques- 
tion of  the  right  of  a  corporation  to  prefer  some  of  its  creditors,  and  the 
question  of  the  right  of  a  corporation  to  give  its  director,  being  a 
creditor,  a  preference. 


ADAMS  AND  WESTLAKE   CO.  v.  DEYETTE  831 

of  an  individual  debtor  to  make  such  preferences.  Manu- 
facturing Co.  V.  Max  (S.  D.),  58  N.  W.  14.  We  said  the 
right  of  a  debtor  to  prefer  one  creditor  over  another  was 
guaranteed  to  him  by  the  express  words  of  the  statute.  Sec. 
4654.  A  corporation  or  a  partnership  becomes  a  debtor 
under  the  same  circumstances  as  an  individual.  If  the  so- 
called  "trust-fund  doctrine"  will  prevent  a  corporation  debtor 
from  so  preferring  one  creditor  to  another,  I  am  unable  to 
see  why  it  should  not  have  the  same  effect,  and  for  the  same 
reason,  in  case  of  a  partnership.  A  corporation  becomes  in- 
solvent just  when  the  partnership  or  the  individual  becomes 
so — when  it  is  unable  to  pay  its  debts  from  its  own  means  as 
they  become  due.  Comp.  Laws,  section  4661.  Is  it  well, 
then,  unless  required  by  prevailing  authority,  to  adopt  the 
rule  that  a  private  corporation,  unable  to  meet  its  debts  as 
they  mature,  has  no  right  to  pay  one  creditor  more  than 
it  pays  all  others?  It  is  often  said  in  the  books  that  the 
assets  of  an  insolvent  corporation  are  a  trust  fund  for  the 
payment  of  its  debts,  but  this  is  also  true  of  a  partnership, 
and  really  of  an  individual ;  and  for  the  same  reason.  Pome- 
roy  says  this  doctrine  of  trust  is  just  as  applicable  to  a  part- 
nership and  its  assets  as  to  a  corporation  and  its  assets,  and 
that  in  either  case  the  relation  can  only  be  so  named  by  way 
of  "analogy  or  metaphor."  He  further  says :  "It  is  plain 
that  no  constructive  trust  can  arise  in  favor  of  the  creditors 
unless  the  partners  or  directors,  through  fraud  or  breach  of 
fiduciar}'  duty,  wrongfully  appropriate  the  property  and 
acquire  the  legal  title  to  it  in  their  own  names,  and 
thus  place  it  beyond  the  reach  of  creditors  through  ordinary 
legal  means."  2  Pom.  Eq.  Jur.  section  1046.  If  the  rule 
of  disability  applies  to  an  insolvent  corporation  on  the 
ground  of  its  trust  relations  to  its  assets,  it  would  seem  that 
it  should  also  apply  to  an  insolvent  partnership;  but  in 
Manufacturing  Co.  v.  Max,  supra,  we  sustained  the  right  of 
Max  &  Baisch,  an  insolvent  partnership,  to  make  such  prefer- 
ences.    I  cannot  see  why,  in  the  case  either  of  a  corporation 


832  FRAIJ;  OX   C  ]>:i:i)l'J-(;RS  OF  L(JR1'()RA'J"10N 

or  a  partnership,  the  mere  fact  of  insolvency,  without  more, 
should  of  itself  change  the  character  of  what  was  the  abso- 
lute property  of  the  corporation  or  partnership  into  trust 
funds.  Insolvency  creates  a  condition  which  justifies  a  court 
with  equity  powers  in  laying  hold  of  assets,  and  then  so 
treating  and  disposing  of  them.  While  the  assets  remain 
undisturbed  in  the  hands  of  the  corporation  or  partnership, 
solvent  or  insolvent,  it  owns  and  may  dispose  of  them  as  an 
individual  owner  may,  in  any  manner  not  fraudulent  as  to 
its  creditors,  including  stockholders  in  case  of  a  corporation. 
Nearly  all  commercial  credit  is  given  to  the  individual,  the 
partnership,  or  the  corporation  on  the  strength  of  its  known 
assets,  and  in  reliance  upon  a  prudent  management  and  an 
honest  appropriation  of  them  to  the  payment  of  its  debts. 
In  this  sense  the  property  of  every  debtor  is  a  trust  fund, 
with  himself  as  trustee,  for  the  payment  of  his  debts.  It  is 
no  more  so  simply  because  the  debtor  is  a  corporation,  so  long 
as  it  continues  its  active  functions  as  such,  and  retains  abso- 
lute control  of  its  property.  At  no  time  does  the  trust  attach 
to  the  property  because  it  belongs  to  a  coq)oration ;  but  when 
the  corporation  becomes  insolvent  and  unable  to  continue  its 
active  life  it  it  so  far  civilly  dead  that  its  assets  become  sub- 
ject to  the  administration  of  the  courts.  From  that  time  on 
the  assets  coming  into  the  hands  of  the  court  are  treated  as 
a  trust  fund  for  the  benefit  of  creditors  and  stockholders,  for 
they  then  constitute  an  estate  to  be  administered.  In  Graham 
V.  Railroad  Co.,  102  U.  S.  148,  the  learned  Judge  Bradley 
said :  "When  a  corporation  becomes  insolvent,  it  is  so  far 
civilly  dead  that  its  property  may  be  administered  as  a  trust 
for  the  benefit  of  its  creditors  and  stockholders.  A  court  of 
equity,  at  the  instance  of  proper  parties,  will  then  make  these 
funds  trust  funds,  which  are,  in  other  circumstances  as  much 
the  absolute  property  of  the  corporation  as  any  man's  prop- 
erty is  his." 

This  trust  doctrine,  as  applied  to  the  assets  of  corpora- 
tions, solvent  and  insolvent,  was  fully  discussed  by  Judge 


ADAMS   AND    WESTLAKE   CO.  -:  DEYETTE  833 

Brewer  in  HoUins  v.  Iron  Co.,  154  U.  S.  371,  14  Sup.  Ct. 
127,  and  the  construction  of  the  court  is  thus  stated  in  the 
head  note :  "The  expression  often  used,  that  the  property 
of  a  corporation  constitutes  a  'trust  fund'  for  its  creditors, 
only  means  that  when  the  corporation  is  insolvent,  and  a 
court  of  equity  has  possession  of  its  assets  for  administration, 
such  assets  must  be  appropriated  to  the  payment  of  its- debts 
before  any  distribution  to  the  stockholders,  but,  as  between 
a  corporation  itself  and  its  creditors,  the  former  does  not  hold 
its  property  in  trust,  or  subject  to  lien  in  favor  of  the  credi- 
tors, in  any  other  sense  than  does  an  individual  debtor."  In 
Van  Alstyne  v.  Cook,  25  N.  Y.  489,  the  court,  in  speaking 
of  the  assets  of  an  insolvent,  limited  partnership,  said  :  "They 
are  trust  funds  when  the  courts  of  equity  are  properly  ap- 
pealed to  in  behalf  of  the  partners,  or  any  partner  or  creditor, 
to  protect  and  distribute  the  same  upon  equitable  prin- 
ciples, and  on  such  application  assert  the  control  over  them. 
They  are  not  trust  funds  in  the  hands  of  the  partners  any 
more  than  ordinary  partnership  property."  The  supreme 
court  of  Illinois  declares  the  same  doctrine  in  Roschoom  v. 
Whittaker,  132  111.  81.  23  N.  E.  339:  "The  mere  insolvency 
of  a  corporation  cannot  have  the  effect  of  depriving  creditors 
of  their  legal  remedies,  but  they  are  at  liberty,  notwithstand- 
ing the  insolvency,  to  sue  the  corporation  in  an  action  at  law, 
and  b}^  means  of  such  proceeding  establish  a  specific  lien  upon 
the  property  seized  by  attachment  or  execution.  Such  lien, 
when  perfected,  will  doubtless  entitle  the  creditor  acquiring 
it  to  a  preference  over  other  unsecured  creditors.  After  the 
aid  of  a  court  of  equity  has  been  invoked,  and  that  court  has 
taken  the  assets  of  the  insolvent  into  its  hands,  its  jurisdiction 
becomes  necessarily  exclusive ;  and  it  will  proceed,  in  admin- 
istering the  insolvent  estate,  upon  the  maxim  that  equality 
is  equity."  See  also,  the  later  case  of  Peterson  v.  Tailoring 
Co.,  150  111.  290,  T^y  N.  E.  242.  In  Tozvn  v.  Bank,  2  Doug. 
(Mich.)  530,  it  was  held  that  a  corporation  has  the  same 
right  to  prefer  one  creditor  over  another  that  an  individual 


834  FRAUD  ON  CREDITORS  OF  C0RP0RAT10.\ 

has.  This  was  followed  in  Kendall  v.  Bishop,  76  Mich.  634, 
43  N.  \V.  645,  and  again  in  the  recent  case  of  Bank  of  Mon- 
treal V.  E.  J.  Potts  S.  &  L.  Co.,  90  Mich.,  345,  51  N.  W.  512, 
where  it  was  held  that  "a  corporation  may,  in  th(;  absence  ot 
legislative  restriction,  deal  with  its  property  precisely  as  an 
individual  may,  and  may  prefer  one  creditor  over  another; 
and  hence  its  assets  do  not  become  a  trust  fund  for  i^ro  lata 
distribution  among  all  of  its  creditors,  until  steps  are  taken 
under  the  'winding-up  act.'  "  This  "trust-fuid"  doctrine  is 
luminously  discussed  by  Judge  Mitchell  in  Hospcs  v.  Car  Co., 
48  Minn.  174,  50  N.  W.  11 17,  who  demonstrates  that,  unless 
prohibited  by  statute,  an  insolvent  corporation  has  the  satne 
right  as  an  inchvidual  to  prefer  creditors,  an.)  that  there  is  no 
solid  foundation  for  the  doctrine  that  the  insolvency  of  a 
corporation  has  the  effect  of  converting  its  assets  into  a  "trust 
fund,"  in  any  proper  sense  of  that  term.  In  Ang.  &  A.  Corp. 
802,  it  is  laid  down  as  an  unqualified  proposition  of  law  that 
"the  mere  insolvency  of  a  corporation  neither  impairs  its 
powers  to  manage  its  affairs  nor  converts  its  property  into  a 
trust  fund  for  the  benefit  of  its  creditors."  Almost  precisely 
the  same  thing  was  said  in  Catlin  v.  Bank,  6  Conn.  233,  and 
reiterated  by  the  same  court  in  Pondville  Co.  v.  Clark,  25 
Conn.  97.  In  the  former  case  the  court  discussed  the  ques- 
tion at  great  length.  In  the  course  of  its  opinion,  it  says : 
"The  cases  of  an  individual  and  of  a  corporation  in  the  mat- 
ter under  discussion,  it  appears  to  me,  are  not  merely  analo- 
gous, but  identical,  and  I  discover  no  reason  for  the  slightest 
difference  between  them.  *  *  *  'pj-,g  insolvent  banking 
corporation  is  just  as  much  a  trustee  of  the  creditors,  and  no 
more,  as  the  insolvent  individual  is  the  trustee  of  his  cred- 
itors." 

The  same  doctrine  as  to  when  the  assets  of  an  insolvent 
corporation  become  trust  funds  was  declared  by  the  Supreme 
Court  of  Missouri  in  La  Grange  Butter  Tub  Co.  v.  NatMnal 
Bank  of  Commerce,  26  S.  W.  710.  The  Court  said:  "In 
case  of  an  insolvent  corporation,  a  court  of  equity  will  make 


ADAMS  AND  WESTLAKE   CO.  v.  DEYETTE  835 

distribution  of  the  corporation  assets  pro  rata  among  the  cor- 
poration creditors,  and  to  that  end  will  regard  the  corporation 
property  as  a  trust  fund.  It  is  in  this  sense,  and  upon  this 
principle,  that  the  assets  are  trust  funds.  They  are  trust 
funds  when  a  court  of  equity  is  appealed  to  in  behalf  of  any 
member  of  the  corporation  or  creditor  to  protect  and  distrib- 
ute the  assets  upon  equitable  principles."  And  again  in  Al- 
berger  v.  Bank,  123  Mo.  313,  27  S.  W.  657,  Judge  Barclay, 
in  speaking  of  the  notion  that  insolvency  transforms  the  as- 
sets of  a  corporation  into  a  trust  fund  said :  "This  theory 
seems  to  have  a  singular  fascination  to  some  learned  jurists, 
but,  in  our  opinion,  it  is  wholly  untenable  as  applied  to  the 
facts  of  such  a  case  as  that  before  us,  under  the  law  of  Mis- 
souri ;"  and,  after  a  very  thorough  and  instructive  discussion 
of  the  question  he  concludes  that  "the  creditor  of  a  corpora- 
tion has  the  same  right  to  secure,  bv  superior  diligence  or 
persistency,  and  to  retain,  a  preference  for  his  claim  against 
a  private  corporation,  that  he  would  have  were  his  debtor 
an  individual  engaged  in  the  same  line  of  business,  provided, 
always,  that  the  transaction  is  honest — that  is  to  say,  not  a 
mere  cover  to  a  purpose  to  hinder,  delay  or  defraud  other 
creditors  of  the  failing  debtor."  Such  is  also  the  declared 
law  in  New  Jersey.  In  JVilkinson  v.  Baucrlc,  41  X.  J.  Eq. 
640,  7  Atl.  514,  the  court  said:  "If  there  be  no  legislative 
prohibition  against  the  transfer  of  corporate  property  or  its 
use  in  preferring  creditors  after  insolvency,  no  reasons  can 
be  given  why  such  transaction  should  be  invalidated,  which 
would  not  also  invalidate  the  like  transactions  of  individuals. 
Both  reason  and  authorit}-  establish  the  proposition  that  a 
corporation  may  sell  and  transfer  its  property,  and  may  pre- 
fer its  creditors,  although  it  is  insolvent,  unless  such  con- 
duct is  prohibited  by  law."  The  supreme  court  of  Arkansas 
in  the  recent  case  of  JVortJicu  v.  Griffith,  59  Ark,  562,  28  S. 
W.  286,  holds  the  same  way,  and  that  "it  is  only  when  a 
court  of  equity,  at  the  instance  of  a  proper  party,  and  in  a 
proper  proceeding,  has  taken  possession  of  the  assets  of  an 


836  FRAUD  ON  CREDITORS  OF  CORPORATION 

insolvent  corporation,  that  its  assets  may,  in  this  state,  oe 
properly  said  to  be  a  trust  fund  for  its  creditors."  The  same 
question  as  to  the  right  of  an  insolvent  corporation  to  make 
preferences  was  before  the  court  in  Gould  v.  Railway  Co., 
52  Fed.  680.  Judge  Caldwell  said  that  it  was  settled  law 
in  Arkansas — from  which  state  the  case  came — that  it  might 
lawfully  do  so,  and  added  this  significant  statement:  "The 
established  rule  in  that  state  is  in  harmony  with  the  general, 
though  not  quite  uniform,  current  of  authorities  in  this 
country  on  the  question."  After  referring  to  a  large  number 
of  supporting  authorities  he  adds:  "The  cases  which  hold 
the  contrary  doctrine  are  bottomed  on  the  erroneous  theory 
that  the  insolvency  of  a  corporation  in  effect  dissolves  it, 
and  makes  the  directors  mere  trustees  to  distribute  its  assets 
ratably  among  its  creditors.  It  is  undoubtedly  true  that  the 
property  of  a  corporation  is,  in  one  sense,  a  trust  fund  for 
the  payment  of  its  debts;  but  this  rule  means  no  more  than 
that  the  property  of  a  corporation  cannot  be  distributed 
among  its  stockholders,  or  applied  to  any  purpose  foreign  to 
the  legitimate  business  of  the  corporation,  until  its  debts  are 
paid.  The  rule,  so  far  as  it  relates  to  the  payment  of  debts, 
is  satisfied  whenever  the  property  of  a  corporation  is  applied 
to  the  payment  of  its  bona  fide  debts.  The  rule,  as  has  been 
often  pointed  out,  does  not  prevent  a  corporation,  whether 
solvent  or  insolvent,  from  making  preferences  among  its 
creditors,  and  exercising  in  good  faith  absolute  dominion 
over  its  property  in  the  conduct  of  its  legitimate  corporate 
business,  so  long  as  its  right  to  do  so  is  not  restrained  by 
statute  or  by  judicial  proceedings."  In  his  opinion  Judge 
Caldwell  refers  to  the  following  authorities,  none  of  which 
I  have  cited,  as  sustaining  his  conclusion :  2  Mor.  Priv.  Corp. 
802  ;  Allls  V.  Jones,  45  Fed.  148 ;  Covert  v.  Rogers,  38  Mich. 
363 ;  Coats  V.  Donnell,  94  N.  Y.  168 ;  Dana  v.  Bank,  5  Watts 
&  S.  223 ;  Warner  v.  Mower,  1 1  Vt.  390 ;  JVhitwell  v.  War- 
ner, 20  Vt.  426 ;  Stratton  v.  Allen,  16  N.  J.  Eq.  229 ;  Wilkin- 
son V.  Bauerle,  41  N.  J.  Eq.  635,  7  Atl.  514;  Duncomh  v. 


ADAMS  AND  WESTLAKE  CO.  7:  DEYETTE  837 

Railroad  Co.,  84  N.  Y.  190,  88  N.  Y.  i ;  Harts  v.  Brozvn,  yy 
111.  226;  Reichwald  \*Hotel  Co.,  106  111.  439;  Buell  v.  Buck- 
ingham, 16  Iowa,  214  (opinion  by  Judge  Dillon)  ;  Garrett 
V.  Plozv  Co.,  70  Iowa,  697,  29  N.  W.  395 ;  Smith  v.  Skcary, 
47  Conn.  47;  Bank  v.  Whittle,  78  Va.  yT,y;  Ashhurst's  Ap- 
peal, 60  Pa.  St.  314;  Sargent  v.  Webster,  13  Mete.  (Mass.) 
497;  Hallam  v.  Hotel  Co.,  56  Iowa,  178,  9  N.  W.  1 1  ir 

The  supreme  court  of  Alabama  is  equally  pronounced 
against  this  "trust-fund"  doctrine,  and  in  a  very  able  and 
elaborate  opinion,  filed  as  recently  as  April  of  the  present 
year,  it  expressly  repudiates  such  doctrine,  and  overrules  a 
number  of  cases  in  which  its  existence  had  been  recognized 
by  that  court.  The  learned  judge  who  writes  the  opinion 
says  :  "There  is  nothing  clearer  in  principle  than  the  proposi- 
tion that  the  property  of  a  corporation,  solvent  or  insolvent, 
bears  identically  the  same  relations  to  the  creditors  of  such 
corporation  as  the  property  of  an  individual  or  copartnership, 
solvent  or  insolvent,  sustains  to  the  creditors  of  the  individual 
or  partnership,  and  is  or  is  not  to  be  impressed  with  a  trust 
character  upon  the  circumstances  and  under  the  same  con- 
ditions in  the  first  case  as  in  the  latter  two."  Jeivelry  Co.  v. 
Volfer  (Ala.),  17  South.  525.  In  the  still  more  recent  case 
of  Thomson-Houston  Electric  Light  Co.  v.  Henderson,  Elec- 
tric &•  Gaslight  Co.,  21  S.  E.  951,  the  North  Carolina  su- 
preme court  deliberately  rejected  the  "trust-fund"  theory, 
and  declared  generally  that  the  relation  between  a  corpora- 
tion creditor  and  the  corporation,  whether  solvent  or  in- 
solvent, is  simply  that  of  creditor  and  debtor,  and  that  the 
creditor  had  no  equitable  claim  upon  the  corporation  assets 
either  because  it  was  a  corporation  or  because  it  was  insolv- 
ent. The  supreme  court  of  Indiana  has  lately  made  the  same 
expression  in  emphatic  terms  in  First  Nat.  Bank  of  Craw- 
fordsville  v.  Dovetail,  B.  &  G.  Co..  40  N.  E.  810,  and  in  the 
same  further  held  (bearing  upon  the  first  question  discussed 
in  this  opinion)  that  "the  fact  that  one  lending  money  to  a 
corporation  knew  that  it  was  to  be  used  by  the  directors  for 


838  FRAUD  ON  CREDITORS  OF  CORPORATION 

a  purpose  involving  a  breach  of  trust  does  not  impair  the 
vahdity  of  the  judgment  against  the  corporation  in  his  favor 
for  the  amount  loaned,  entered  by  the  corporation's  consent, 
with  the  purpose  of  creating  a  preference."  In  Burrill, 
Assignm.  (5th.  Ed.)  Sec.  64,  it  is  said:  "It  has  been  ob- 
jected *  *  *  that  on  the  happening  of  its  insolvency  the 
corporation  and  its  agents  became  trustees  for  the  creditors, 
who  where  entitled  to  a  ratable  payment  out  of  the  trust  furtd 
in  proportion  to  the  amount  of  their  debts.  This  position, 
however,  has  not  been  sustained,  and  apart  from  statutory 
provisions,  no  distinction  exists  between  an  individual  and 
a  corporation  in  regard  to  the  exercise  of  the  power  of  con- 
ferring preferences." 

Without  quoting  from  other  cases,  in  which  very  wise 
and  thoughtful  judges  have  announced  similar  views,  I  am 
satisfied  to  say  that  to  me  they  seem  right  in  principle.  If, 
for  any  reason,  there  should  be  a  discrimination  between 
different  classes  of  debtors  in  respect  to  the  right  to  make 
preferences  among  their  creditors,  as  said  by  Judge  Dillon 
in  Bitell  v.  Buckingham,  supra,  the  rule  should  be  declared  by 
the  legislature,  which  has  the  constitutional  power  to  make 
and  change  the  law,  and  not  by  the  courts,  which  have  no 
such  power.  It  may  be  remarked,  however,  that  as  to  some 
of  the  cases  cited  generally  in  support  of  the  contrary  doc- 
trine they  were  controlled  by  local  statutes  which  unfortun- 
ately are  not  mentioned,  or  at  least  not  made  prominent,  in 
the  opinion.  For  instance,  both  Ohio  and  Texas  cases  are 
cited  as  opposed,  and  Rouse  v.  Bank,  46  Ohio  St.  493,  22  N. 
E.  293,  and  Lyons-Thomas  Hardzvare  Co.  v.  Perry  Stoz'e 
Manuf'g  Co.,  86  Tex.  143,  24  S.  W.  16,  do  so  read,  but  in 
each  state  there  was  a  statute  declaring  that  any  transfer  of 
property  as  a  preference  by  a  debtor  who  is  insolvent  "or  in 
contemplation  of  insolvency"  shall  not  be  valid  as  against 
an  assignment  then  in  contemplation  for  the  benefit  of  cred- 
itors. What  influence,  if  any,  this  declared  policy  of  the 
state  law  had  upon  the  treatment  of  the  general  question  by 


ADAMS  &  WESTLAKE  CO.  v.  DEYETTE  839 

the  courts  we  do  not  know.  I  have  read  with  interest  wliat 
Mr.  Thompson  says  upon  this  question  in  his  recently  pub- 
hshed  work  on  Corporations.  He  is  an  author  of  acknowl- 
edged learning  and  ability.  Upon  all  matters  he  expresses 
his  personal  views  positively  and  clearly,  and  usually 
courteously  and  dispassionately;  but  his  treatment  of  this 
question,  his  characterization  of  the  deliberately  declared 
opinions  of  eminent  courts  and  judges  as  "the  mouthings  of 
judges"  with  "low  conceptions,"  "destitute  of  a  sense  of 
justice,"  and  other  similar  flippancies,  evince  such  a  degree 
of  morbidity  upon  this  subject  as  greatly  to  compromise  the 
value  of  his  opinion.  He  says  (Sec.  6496)  the  "fallacy"  of 
the  conclusion  to  which  these  thoughtless  judges  have 
"jumped"  is  in  overlooking  "the  fact  .that  the  analog}'  be- 
tween an  individual  and  an  insolvent  corporation  wholly 
fails  in  this :  that  although  an  insolvent  individual  may  turn 
over  his  property  to  certain  of  his  creditors  whom  he  de- 
sires to  prefer,  and  may,  by  so  doing,  hinder  and  delay  the 
others,  yet  he  merely  delays  and  hinders  them ;  he  does  not, 
by  that  act,  destroy  himself;  he  still  lives;  and  he  may,  and 
often  does,  get  on  his  feet  again,  and  acquire  property,  and 
discharge  his  previous  obligations.  But  when  a  corporation 
becomes  insolvent,  and  ceases  to  have  the  means  of  carrying 
out  the  object  of  its  creation,  and  dispossesses  itself  of  all 
its  property,  it  destroys  itself,  and  becomes  ipso  facto  dis- 
solved." In  his  zeal  to  demonstrate  the  "fallacy."  has  not 
the  learned  author  allowed  himself  to  start  from  unstable 
premises?  Is  it  entirely  safe  to  build  upon  the  foundation 
that  when  a  corporation  becomes  insolvent,  "and  dispossesses 
itself  of  all  its  property,  it  destroys  itself,  and  becomes  ipso 
facto  dissolved?"  In  Sec.  6483  of  the  same  book  he  has 
told  us  that  "the  assignment  by  a  corporation  of  all  its  prop- 
erty for  the  benefit  of  its  creditors  does  not  extinguish  it  as 
a  corporation,  or  disable  it  from  maintaining  an  action,  un- 
less the  subject-matter  of  the  action  passed  from  it  1)\'  the 
assignment."     In  this  latter  statement  he   seem^s  well  suj)- 


840  FRAUD  ON  ('RF.niTORS  OF  CORPORATION 

ported  by  authority,  though  Judge  Story,  in  a  dissenting 
opinion  in  Bcaston  v.  Bank,  12  Pet.  138,  intimated  a  con- 
trary opinion.  See  Burrill,  Assignm.  (5th  Ed.)  Sec.  64; 
Ang.  &  A.  Corp.  Sec.  770;  and  cases  cited  by  each  of  these 
authors.  The  law  is  generally  recognized  to  be,  as  stated 
by  Mr.  Thompson,  that  neither  the  insolvency  of  nor  a  gen- 
eral assignment  by  a  private  corporation  works  its  dissolu- 
tion. An  individual  debtor,  stripped  of  his  means  for 
satisfying  his  debts,  "still  lives" ;  but  it  is  just  as  true  of  a 
corporation.  Each  is  still  a  living  debtor  without  present 
ability  to  pay  his  or  its  debts.  It  is  probably  true  that  an 
individual  debtor  is  more  likely  to  "get  on  his  feet  again," 
but  that  is  incidental  merely,  and  does  not  prove  or  tend  to 
prove  any  difference  in  their  legal  status.  The  possession 
of  property  is  no  more  essential  to  the  existence  of  a  cor- 
poration than  it  is  to  the  existence  of  a  man.  If  a  cor- 
poration becomes  insolvent,  there  is  nothing  to  prevent  its 
members,  until  its  dissolution  is  legally  declared,  from  fur- 
nishing more  funds,  and  proceeding  to'  use  its  corporate 
powers.  Mor.  Priv.  Corp.  Sec.  loio,  and  citations.  My 
conclusion  is  that  the  hardware  company,  although  insol- 
vent, might  legally  prefer  Deyette  as  a  creditor,  and  that  his 
judgment,  founded  on  a  good  consideration,  was  not  in- 
valid or  unenforceable  on  account  of  such  preference. 

As  to  Lewis  and  his  judgment,  the  facts  established  by 
the  findings  are  the  same,  except  that  at  the  date  of  his  judg- 
ment and  before — but  how  long  before  is  not  found — he  was 
a  director  and  secretary  of  the  company.  He,  too,  loaned 
money  to  the  company  for  the  purpose  of  buying  the  Trask 
stock  and  it  not  being  shown  that  at  the  time  of  such  loaning 
and  purchase  he  had  any  connection  with  the  company,  he, 
as  a  creditor,  would  stand  upon  the  same  footing  as  Deyetts, 
except  that  when  his  judgment  was  confessed  he  was  a  di- 
rector and  officer  of  the  company.  On  the  9th  day  of  May 
the  company  confessed  these  judgments — one  to  Deyette, 
alreadv  considered ;  one  to  Foster,  over  which  there  seems 


ADAMS  &  WESTLAKE  CO.  v.  DEYETTE  841 

to  be  no  controversy ;  and  one  to  Lewis,  now  in  hand.  Lewis 
himself  executed  these  confessions  as  secretary  of  the  com- 
pany. Executions  were  issued  on  these  judgments,  and 
levied  upon  the  personal  property  of  the  hardware  company, 
but  when  issued  or  when  levied  does  not  appear.  On  the 
1 2th,  execution  was  also  issued  on  respondent's  judgment. 
The  property  was  sold,  and  the  proceeds  which  are  "noi  suf- 
ficient to  pay  the  judgments  against  the  Hicks-Trask  Hard- 
ware Company  prior  to  the  judgment  of  plaintiff"  (respond- 
ent), are  held  by  the  sheriff  "to  be  applied  on  said  executions 
according  to  the  decree  of  this  court."  It  not  appearing 
that  executions  were  issued  on  other  judgments  than  those 
named,  we  understand  from  the  language  of  the  findings 
that  the  proceeds  are  insufficient  to  pay  the  three  judgments 
first  named.  The  Foster  and  the  Deyette  judgments  being 
good,  and  entitled  to  be  paid,  the  contest  is  over  the  balance 
in  the  hands  of  the  sheriff,  and  between  Lewis  and  the  re- 
spondent. While  the  findings  do  not  expressly  show — as  we 
wish  they  did — when  the  execution  on  the  Lewis  judgment 
was  issued  or  levied,  it  must  have  been  prior  to  the  issuance 
of  respondent's  execution,  for  the  property  appears  to  have 
been  sold  under  the  Lewis,  Foster  and  Deyette  executions. 
The  fact  that  the  company  was  insolvent,  that  it  confessed 
these  three  judgments  on  the  9th,  and  that  three  days  there- 
after it  confessed  judgment  to  cjuite  a  number  of  other  cred- 
itors, including  respondent,  and  that  executions  were  issued 
and  levied  on  the  first  three  judgments  either  prior  to  or  on 
the  1 2th,  the  date  of  the  subsequent  judgments,  and  before 
respondent's  execution,  issued  immediately  upon  obtaining 
its  judgment,  is  very  convincing,  though  perhaps  not  incon- 
testible,  evidence  that  it  was  intended  that  Foster,  Lewis  and 
Deyette  should  be  given  a  preference  over  other  creditors. 
I  have  no  doubt  that  it  was  so  designed.  So  that  the 
question  now  in  hand  is,  could  the  company  legally  prefer 
Lewis,  a  director,  and  one  of  its  managing  officers,  on  ac- 
count of  an  indebtedness  not  contracted  on  the  strength  of 


842  FRAUD  ON  CREDITORS  OF  CORPORATION 

such  preference,  but  for  a  general  antecedent  indebted- 
ness? I  think  that  we  can  hold  that  it  could  not,  con- 
sistently with  what  I  have  already  said  in  respect  to  the  right 
generally  of  an  insolvent  corporation  to  prefer  creditors. 
While  the  directors  and  officers  of  a  corporation,  solvent  or 
insolvent,  are  not  in  any  proper  sense  the  trustees  of  the 
creditors,  they  do  occupy  a  relation  to  them  demanding  the 
utmost  good  faith  on  their  part  in  the  handling  of  the  corpo- 
ration assets.  To  their  honesty  and  fair  dealing  with  the 
property,  and  to  their  just  and  prudent  management  of  the 
business,  the  creditors  must  look  for  their  continued  security. 
As  in  the  case  of  others  occupying  a  fiduciary  position,  they 
cannot  innocently  sacrifice  the  interests  of  those  who  trust 
them  to  their  own  personal  advantage.  As  managers  of  the 
corporation  and  its  property,  they  owe  a  duty  to  those  deal- 
ing with  them,  which  they  violate  when,  to  the  detriment  of 
those  who  confide  in  them,  they  make  themselves  preferred 
beneficiaries  in  the  disposition  of  assets  which  without  such 
preference,  would  be  available  alike  to  all  creditors.  They 
hold  in  their  hands  the  property  of  the  corporation  to  which 
creditors  must  look  for  satisfaction  of  their  claims  and  come 
within  the  just  principle  that  one  who  has  possession  and 
control  of  property  for  the  benefit  of  others  besides  himself 
may  not  dispose  of  it  for  his  own  special  advantage,  to  the 
injury  of  others, for  whom  it  is  also  held. 

The  judgment  in  this  case  was  confessed.  Lewis  him- 
self as  secretaiy  of  the  company  executed  the  confession  to 
himself.  It  was  not  a  hostile  proceeding  against  the  com- 
pany in  which  he  acted  as  a  creditor  only,  but  was  a  voluntary- 
effort  on  the  part  of  the  company,  executed  through  and  by 
him  as  its  secretary,  to  give  himself  an  advantage  over 
creditors  generally,  with  no  equities  to  justify  such  prefer- 
ence, except  that  he  was  a  general  creditor  on  account  of  an 
antecedent  indebtedness.  I  do  not  think  such  a  preference 
should  be  sustained. 

In  many  of  the  states  which  recognize  the  general  right 


ADAMS  &  WESTLAKE  CO.  v.  DEYETTE  843 

of  an  insolvent  corporation  to  make  preferences  among  its 
creditors,  such  preferences  in  favor  of  its  own  directors  on 
account  of  antecedent  indebtedness,  in  the  absence  of  special 
equities  are  not  sustained.  See  Gottlieb  v.  Miller,  154 
111.  44,  39  N.  E.  992,  where  a  preference  was  sustained  as 
to  outside  creditors,  and  set  aside  as  to  directors.  See,  also 
Lippincott  v.  Carriage  Co.,  25  Fed.  577,  where  a  large- num- 
ber of  cases  are  cited  to  the  point  that  directors  and  manag- 
ing officers  cannot  be  preferred.  Montgomery  v.  Phillips 
(N.  J.  Err.  &  App.)  31  Atl.  622,  followed  in  Mallory 
V.  Kirkpatrick  (N.  J.  Ch. )  33  Atl.  205;  Henderson  y.  Tritst 
Co.  (Ind.  Sup.)  40  N.  E.  516;  Corey  v.  JVadsworth  (Ala.) 
1 1  South.  350.  See,  also,  upon  this  a  valuable  note  to  Lyons- 
Thorws  Hardzvare  Co.  v.  Perry  Stove  Manufg  Co.  (Tex. 
Sup.)  in  22  Lawy.  Rep.  Ann.  802,  24  S.  W.  16,  in  which 
the  editor's  conclusion  is  thus  stated :  **On  examination  of 
the  decisions,  it  is  clear  that  the  weight  of  authority  is  over- 
whelmingly in  favor  of  the  legality  of  preferences  to  ordin- 
ary creditors,  except  as  restricted  by  statute,  and  ovei-whelm- 
ingly  against  the  validity  of  such  preference  when  made  in 
favor  of  directors." 

The  trial  court  held  the  Lewis  judgment  invalid,  both 
because  of  the  invalidity  of  its  consideration  and  because  it 
was  the  result  of  an  attempt  to  give  preference  to  a  director. 
For  reasons  stated  early  in  this  opinion,  I  think  the  first 
ground  untenable.  As  to  the  second  ground,  I  am  of  the 
opinion  that  he,  being  a  director,  and  one  of  the  managing 
officers  of  the  company,  ought  not  to  get  any  advantage  in 
the  nature  of  a  preference,  but  that  the  court  was  wrong  in 
holding  his  judgment  void  and  in  denying  him  participation 
in  the  distribution  of  the  proceeds  of  sale  in  the  hands  of  the 
sheriff.  This  seems  to  be  the  policy  of  our  statute.  If,  by  a 
general  assignment,  this  preference  had  been  attempted  in 
favor  of  Lewis,  the  preference  would  have  failed,  but  he 
would  still  have  been  entitled  to  share  ratably  with  other 
creditors.    Comp.  Laws,  §4660.     I  think  there  is  much  in  the 


844  FRAUD  ON  CREDITORS  OF  CORPORATION 

majority  opinion  that  is  sentimentally  good  and  wholesome, 
but  that  the  text  from  which  it  is  elaborated  cannot  be  found 
anywhere  in  the  facts  returned  by  the  trial  court,  or  of  which 
we  have  any  judicial  knowledge. 

Finally,  I  cannot  quite  understand  how  the  court,  having 
deliberately  declared  that  the  assets  of  this  corporation,  being 
insolvent,  constitute  a  fund  for  ratable  distribution  among  its 
creditors  without  preference,  can  affirm  this  judgment,  which 
gives  to  this  respondent  creditor  practically  the  entire  assets 
of  the  corporation,  in  the  face  of  the  record  showing  other 
creditors,  whose  judgments  were  confessed  at  the  same  time, 
and  which  must  go  unpaid.  This  is  an  equitable  action  in  the 
nature  of  a  creditors'  bill  in  behalf  of  this  plaintiff  only,  and 
the  remark  of  Judge  Thayer  in  Walker  v.  Miller,  59  Fed. 
871,  seems  pertinent:  "If  this  trust-fund  theory  is  to  be 
adopted  to  prevent  the  corporation  from  granting  a  prefer- 
ence because  of  its  insolvency,  we  know  of  no  reason  why  it 
should  not  be  invoked  to  keep  attaching  creditors  at  bay,  and 
thus  relegate  the  disposal  of  the  fund,  so  far  as  judicial  pro- 
ceedings are  concerned,  to  a  court  of  equity."  See,  also, 
Mallory  v.  Kirkpatrick,  supra} 


*For  other  cases  involving  preferences  to  officers  or  stockholders 
of  a  corporation.  See  Amer.  Dig.  tit.  Corporations,  Key,  No.  545;  12 
Cent.  Dig.  tit.  Corporations,  §§  2170-2175.     Also,  10  Cy.  C.  1251-1258. 


CHICAGO,  ETC.,  R.  R.  CO.  v.  NATIONAL  BANK        845 


CHICAGO,  MILWAUKEE  AND  ST.  PAUL  RAIL- 
ROAD CO.  V.  THIRD  NATIONAL  BANK  OF 
CHICAGO. 

In  the  Supreme  Court  of  the  United  States,   1890. 

134   United   States  Reports,  276. 

On  April  i,  1880,  resolutions  were  passed  by  the  stocK- 
holders  of  the  Chicago  and  Pacific  Railroad  Company, 
authorizing  the  leasing  of  its  property  and  franchises  to 
the  Chicago,  Milwaukee  and  St.  Paul  Railway  Company, 
and  also  the  execution  of  a  new  mortgage;  and  on  the  next 
day,  the  first-named  company  executed  its  lease  to  the  last- 
named  company,  and  the  two  companies  executed  a  joint 
trust  deed  upon  the  same  property  to  secure  the  payment 
of  $3,000,000  of  bonds,  payable  in  thirty  years.  By  the 
lease,  which  was  for  999  years,  the  lessor  (which  will  for 
convenience  be  called  the  Pacific  Company)  not  only  dis- 
abled itself  from  performing  the  functions  and  discharging 
the  duties  of  its  incorporation,  but  also  transferred  all  its 
property  and  franchises  to  the  lessee  (hereafter  called  the 
Milwaukee  Company).  The  consideration  of  the  lease  was 
$1.00,  and  the  performance  of  the  convenants  of  the  lease 
by  the  lessee.  The  Pacific  Company  was  largely  indebted 
outside  of  th';  amount  secured  by  the  trust  deed;  it  there- 
fore surrendered  to  the  Milwaukee  Company  all  the  means 
it  had  of  discharging  its  indebtedness.  Among  the  recitals 
in  the  lease  were  these : 

"Whereas  certain  other  parties  to  whom  the  said  party 
of  the  second  part  was  so  as  aforesaid  indebted  have  prose- 
cuted their  several  demands  in  the  Superior  and  Circuit 
Courts  of  Cook  County,  and  other  courts  of  the  State  of 
Illinois,  and  have  procured  divers  judgments  thereon,  which 
now  remain  unpaid  and  unsatisfied  of  record,  and  are  a 
lien  upon  the  property  of  the  said  party  of  the  first  part, 


846  FRAUD  ON  CREDITORS  OF  CORPORATION 

and  other  of  said  demands  still  remain  unliquidated;  and 
whereas  the  said  party  of  the  second  part,  at  the  request 
of  the  said  party  of  the  first  part,  now  proposes  to  aid  the 
party  of  the  first  part  in  procuring  a  sufficient  sum  of 
money  to  redeem  said  property  from  the  aforesaid  sale, 
and  to  protect  said  property  from  all  the  aforesaid  valid 
judgment  liens,  and  also  to  extend  and  construct  the  road 
of  said  party  of  the  first  part  to  the  Mississippi  River; 
.  and  also  to  pay  all  taxes,  charges,  or  assessments 
imposed  or  assessed,  or  whch  may  be  hereafter  imposed  or 
assessed,  upon  the  property  or  premises  of  the  party  of  the 
first  part." 

And  among  the  covenants  of  the  lessee  were  these : 
"The  said  party  of  the  second  part,  in  consideration 
of  the  said  demise  and  lease  so  as  aforesaid  made  by  the 
said  party  of  the  first  part,  hereby  covenants  and  agrees 
that  it  will  take  up,  pay,  cancel,  satisfy  and  discharge  the 
said  three  thousand  bonds  of  one  thousand  dollars  each  at 
maturity  thereof,  and  will  pay,  cancel  and  discharge  each 
and  every  of  the  coupons  or  interest  warrants  attached  to 
the  said  bonds,  and  each  of  them,  as  the  same  shall  be- 
come due  and  payable,  so  as  aforesaid  to  be  made  and  issued 
to  the  parties  of  the  first  and  second  parts  and  will,  during 
the  continuance  of  this  lease,  at  all  times  save  the  said 
party  of  the  first  part  free  and  harmless  therefrom,  and 
from  the  mortgage  so  as  aforesaid  to  be  executed  by  the 
said  parties  of  the  first  and  second  parts  to  the  Farmers' 
Loan  and  Trust  Company,  on  the  second  day  of  April,  1880, 
and  the  said  party  of  the  second  part  shall  and 
will,  at  its  own  proper  cost  and  expense,  preserve  and  keep 
the  railway  and  premises  hereby  demised,  and  every  part 
of  the  same,  in  thorough  repair,  working  order  and  con- 
dition, and  supplied  with  rolling-stock  and  equipment,  so 
that  the  business  of  the  said  demised  railway  shall  be  pre- 
served, encouraged  and  developed.  .  .  .  The  said  party 
of  the  second  part  hereby  covenants,  promises  and  agrees 


CHICAGO,  ETC.,  R.  R.  CO.  v.  NATIONAL  BANK        847 

to  and  with  said  party  of  the  first  part  that  at  the  end  of 
said  term,  or  other  sooner  determination  of  this  said  lease, 
the  said  party  of  the  second  part  shall  re-deliver  and  sur- 
render up  to  the  party  of  the  first  part,  its  successors  or  as- 
signs, the  said  demised  railway  and  premises  in  as  good 
order  and  condition  as  the  same  shall  be  delivered  to  the 
said  party  of  the  second  part  under  this  lease,  and  withr  such 
additions,  betterments  and  improvements  as  shall  have  been 
made  thereto." 

The  bonds  were  sold  at  ninety-seven  cents,  and  the 
amount  necessary  to  redeem  from  the  foreclosure  sale  was 
about  $1,100,000.  Out  of  the  proceeds  of  these  bonds  the 
Milwaukee  Company  not  only  completed  the  construction 
of  the  entire  road  authorized  by  the  charter  of  the  Pacific 
Company,  from  Chicago  to  the  Mississippi  River,  but  also 
constructed  a  bridge  over  the  Mississippi  River,  so  as  to  con- 
nect this  road  with  its  own  line  in  Iowa.  The  Chicago  Bank, 
a  judgment  creditor  of  Pacific  Company  sought  by  a  cross 
bill  in  certain  equitable  proceedings  instituted  by  the  two 
companies  to  have  its  judgment  paid  by  the  Milwaukee  Com- 
pany. 

The  court  in  its  decree,  ordered  "that  the  Chicago, 
Milwaukee  and  St.  Paul  Railway  Company  pay  in  to  the 
clerk  of  this  court,  within  thirty  days,  a  sum  of  money 
sufficient  to  satisfy  the  judgment,  costs  and  interest  rendered 
in  favor  of  the  Third  National  Bank  of  Chicago  against  The 
Chicago  and  Pacific  Railroad  Company,  including  also  the 
amount,  with  interest,  paid  by  the  Third  National  Bank  of 
Chicago  to  the  United  States  marshal  for  the  Northern 
District  of  Illinois,  to  redeem  from  the  sale  to  Albert  Keep 
as  aforesaid;  and  it  is  further  ordered,  adjudged  and  de- 
creed, that  in  case  the  Chicago,  Milwaukee  and  St.  Paul 
Railway  Company  shall  fail  to  pay  said  sum  of  money 
aforesaid  within  said  thirty  days,  the  Third  National  Bank 
of  Chicago  may  move  the  court  for  the  appointment  of  a 
receive;,  with  the  usual  power  of  receivers,  to  take  possession 


848  FRAUD  ON  CREDITORS  OF  CORPORATION 

of  the  said  leased  property  and  to  operate  it  until  the 
amount  due  to  the  said  Third  National  Bank  of  Chicago 
upon  its  judgment  as  aforesaid,  with  costs  and  interest 
thereon,  and  the  amount,  with  interest  thereon  so  paid  by 
the  Third  National  Bank  of  Chicago  to  the  United  States 
marshal  for  the  Northern  District  of  Illinois,,  to  redeem 
from  said  sale  to  Albert  Keep,  is  paid  out  of  the  earnings 
of  said  road,  and  for  any  other  proper  relief." 

From  this  decree  the  Chicago,  Milwaukee  and  St.  Paul 
Railway  Company  appealed.^ 

Mr.  Justice  Brewer.  Upon  the  facts  can  the  vahdity 
of  the  decree  requiring  the  Milwaukee  Company  to  pay  to 
the  bank,  within  a  specified  time,  the  amounts  of  the  two 
judgments  held  by  it  be  successfully  questioned?  We  think 
not.  It  would  perhaps  be  difficult  to  point  out  any  separate 
clause  in  the  lease  by  which  the  Milwaukee  Company  obli- 
gated itself  to  pay  the  judgment  in  favor  of  the  bank,  and 
yet  there  is  force  in  the  contention  that,  taken  as  a  whole,  the 
instrument  casts  this  burden  upon  the  company.  A  part  of 
the  subject  matter  of  the  contracts  was  claims  against  the 
Pacific  Company.  One  recital  is  of  the  foreclosure  debt;  im- 
mediately following  is  one  of  the  existence  of  claims,  some 
of  which  had  been  sued  on  and  passed  into  judgment  and 
become  liens,  others  still  unliquidated;  followed  by  the 
recital  that  the  purpose  of  this  arrangement  is  the  redemp- 
tion from  said  foreclosure  sale,  and  the  protection  of  the 
property  from  all  the  aforesaid  valid  judgment  liens.  Nar- 
rowly, the  valid  judgment  liens  referred  to  may  include  only 
those  already  existing,  mentioned  in  the  preceding  recital; 
or,  broadly  all  valid  judgment  liens  perfected  on  the  claims 
named  in  that  recital,  whether  already  in  judgment  or  not. 
If  these  were  all  the  provisions,  the  narrow  construction 
mJght  be  preferred;  but  the  further  and  express  covenants 

*  The  facts  are  in  part  restated,  and  the  Reporter's  notes  of  the 
argument  of  counsel  omitted.  Only  so  much  of  the  facts  and  the 
opinion  are  given  as  relate  to  the  substantive  rights  of  the  creditors  of 
the  Pacific  Company  against  the  Milwaukee   Company. 


CHICAGO,  ETC..  R.  R.  CO.  v.  NATIONAL  BANK        849 

of  the  Milwaukee  Company  were  to  pay  and  discharge  fully 
the  proposed  indebtedness  of  $3,000,000.  and  to  return  at 
the  end  of  the  lease,  to  the  lessor,  the  demised  property. 
Does  not  this  indicate  that  the  understanding  and  intent 
were  that  the  Milwaukee  Company  should  discharge  all 
judgment  liens  founded  upon  existing  claims,  whether  such 
liens  had  already  been  perfected,  or  should  be  created  in 
subsequent  suit?  A  judgment  after  a  lease  does  not  of  its 
own  right  defeat  the  lease,  or  deprive  the  lessee  of  his  interest 
and  possession ;  but  it  operates  against  the  lessor,  and  what- 
ever interest,  great  or  small,  is  retained  in  the  leased 
premises.  The  purpose  of  this  stipulation  was  not  the  pro- 
tection of  the  lessee,  but  of  the  lessor.  It  was  not  that 
the  lessee  should  be  able  to  retain  and  enjoy  the  possession 
during  the  terms  of  the  lease;  but  that  the  property  should 
be  freed  from  all  burdens,  so  that  at  the  termination  of  the 
lease  the  lessor  might  retake  and  enjoy  it.  The  scope  of  the 
contract  was  not  the  payment  of  the  debts  of  the  lessor,  for 
a  mere  debt,  never  passing  into  judgment,  casts  no  burden 
upon  the  interest  of  lessor  or  lessee  in  the  property,  and  the 
removal  of  all  burdens  Avas  apparently  the  intent  of  the  con- 
tracting parties.  But  again,  the  express  lien  on  the  lessor's 
property  amounted  only  to  about  $1,100,000;  yet,  by  the 
arrangement,  a  new  lien  was  created  from  which  nearly 
$3,000,000  was  received,  all  of  which  sum  passed  into  the 
hands  of  the  lessee.  Will  not  equity,  for  the  payment  of 
the  debts  of  the  lessor,  follow  this  surplus  into  the  hands 
of  the  lessee?  Can  a  corporation  in  debt  transfer  its  entire 
property  by  lease,  so  as  to  prevent  the  application  of  the 
property,  at  its  full  value,  to  the  satisfaction  of  its  debts? 
Central  Railroad  v.  Pettiis,  113  U.  S.  116.  124;  Mellen  v. 
Moline  Iron  Works,  131  U.  S.  352.  366.  We  do  not  care 
to  pursue  an  inquiry  into  this  question  at  length,  or  consider 
what  limitations  would  surround  this  doctrine  as  applied 
generally,  preferring  to  notice  a  single  matter,  which  is 
significant  and  decisive.     The  contracting  parties  arranged 


850  FRAUD  ON  CREDITORS  OF  CORPORATION 

not  merely  for  the  discharge  of  the  foreclosure  lien,  but  for 
the  completion  of  the  road  for  which  the  lessor's  franchise 
was  granted.  The  lessee  not  only  performed  these  stipula- 
tions, but  with  moneys  arising  from  the  sale  of  these  bonds 
built,  for  its  own  benefit,  a  bridge  across  the  Mississippi 
River,  connecting  this  road  with  its  line  in  Iowa,  and  thus 
making  a  continuous  line  of  road  to  Omaha.  Neglecting  to 
pay  the  debts  of  the  lessor,  it  appropriated  a  large  amount 
of  the  proceeds  of  the  trust  deed  upon  the  lessor's  property 
to  its  own  benefit,  and  the  improvement  of  its  own  property. 
Here  clearly  was  a  diversion  of  funds,  which  the  creditors 
of  the  lessor  might  follow  in  equity.  This  is  only  the  applica- 
tion of  familiar  doctrine.  The  properties  of  a  corporation 
constitute  a  trust  fund  for  the  payment  of  its  debts ;  and, 
when  there  is  a  misappropriation  of  the  funds  of  a  corpora- 
tion, equity,  on  behalf  of  the  creditors  of  such  corporation, 
will  follow  the  funds  so  diverted.  The  Milwaukee  Com- 
pany, from  securities  on  the  property  of  the  Pacific  Com- 
pany, received  nearly  three  millions  of  dollars;  part  it  used 
for  the  benefit  of  the  lessor  company,  and  part  it  appropriated 
to  its  own  benefit.  Can  it  do  this,  and  let  the  lessor 
company's  debt  go  unpaid?  Equity  answers  this  question 
in  the  negative,  and  such  was  the  ruling  of  the  circuit  iudgi 
26  Fed.  Rep.  820.  *  *  * 
Decree  affirmed. 


VANCE  X'.  ^rcNABB  COAL  AND  COKE  CO.  851 


VANCE  V.  McNABB  COAL  AND  COKE  CO. 
In  the  Supreme  Court  of  Tennessee,    1892. 

92    Tennessee  Reports,  47. 

The  McNabb  Coal  and  Coke  Co.  sold  and  transferred 
all  its  property  to  the  Consolidated  Coal  and  Iron  Co.,  the 
only  real  consideration  moving  to  the  McNabb  Company 
being  $400,000  of  the  stock  of  the  Consolidated  Company, 
which  stock  was  not  paid  to  the  McNabb  Company,  but 
distributed  among  the  stockholders  of  that  company.  The 
Consolidated  Company  had  no  other  property  or  capital 
of  any  kind  except  what  it  received  from  the  McNabb  Com- 
pany. The  McNabb  Company  sold  115,000  of  its  bonds  to 
C.  W.  Short  for  $115,000.  Short,  however,  paying  $20,000 
of  this  sum  to  the  Consolidated  Company.  The  Consoli- 
dated Company  then  mortgaged  its  property  to  the  Farmers' 
Loan  and  Trust  Co.  to  secure  an  issue  of  $300,000  of  bonds. 
This  bill  was  filed  by  the  creditors  of  the  McNabb  Company 
to  set  aside  the  conveyance  of  its  property  and  to  wind  up 
its  affairs  as  an  insolvent  corporation.  The  chancellor  ad- 
judged that  the  McNabb  Company  was  indebted  to  various 
creditors  in  separate  sums  aggregating  $4,358.92.  He 
further  adjudged  that  the  $20,000  paid  to  the  Consolidated 
Company  by  C  W.  Short  was  an  asset  of  the  McNabb  Com- 
pany, and  that  the  plaintiffs  should  recover  of  the  former 
company  $4,358.92.  Both  the  plaintiffs  and  the  Consoli- 
dated Company  sued  out  writs  of  error. ^ 

Caldwell.  /..•  *  *  =■=  It  is  perfectly  obvious  that  the 
decree  is  appropriate,  and  rested  upon  sound  reason,  as  far 
as  it  goes.  The  $20,000  paid  by  Short  to  the  Consolidated 
Coal  and  Iron  Company,  was  part  of  the  consideration 
due    from    him    to    the    McNabb    Coal    and   Coke   Com- 


'  The   facts   are-   restated   froin  the   opinion   of   the   Court,  and  that 
part  of  the  opinion  in  which  the  facts  are  set  forth  at  length  is  omitted. 


852  FRAUD  ON  CREDITORS  OF  CORPORATION 

pany  for  its  $115,000  of  bonds  purchased  by  him,  and. 
as  a  consequence,  the  Consolidated  Coal  and  Iron 
Company  had  no  legal  right  whatever  to  the  money. 
Its  receipt  and  holding  of  the  money,  under  whatever  claim 
or  pretense,  was,  in  legal  contemplation,  for  the  use  of  the 
true  owner,  the  McNabb  Coal  and  Coke  Company.  By  tak- 
ing the  money  into  its  treasury,  the  Consolidated  Coal  and 
Iron  Company  became,  as  it  were,  a  trustee  in  its  own  wrong 
for  the  benefit  of  the  creditors  of  the  McNabb  Coal  and 
Coke  Company,  and  in  that  capacity  it  must  be  held  respon- 
sible in  a  court  of  equity. 

It  is  quite  as  clear  that  the  Chancellor  did  not  go  far 
enough  in  the  measure  of  relief  granted. 

By  every  rule  of  law  and  equity  the  $400,000  of  capital 
stock  issued  by  the  Consolidated  Coal  and  Iron  Company  to 
the  share-holders  of  the  McNabb  Coal  and  Coke  Company 
belonged  to  the  latter  company  in  its  corporate  capacity, 
as  assets  for  the  benefit  of  its  creditors  in  the  first  instance. 
That  stock  was  the  only  consideration  actually  passing  from 
the  purchasing  to  the  selling  company  for  its  property,  and 
could  not  rightfully  be  appropriated  by  share-holders,  as  was 
done,  to  the  detriment  of  creditors. 

The  consideration  of  the  deed  of  Februar)'-  22,  1887, 
though  that  deed  did  not  cover  all  the  property,  was,  as  has 
already  been  seen,  not  less  than  $1,000,000  of  paid-up  capital 
stock,  to  be  issued  to  the  McNabb  Coal  and  Coke  Company. 
The  option  contract,  made  with  McNeale  and  Donohue  some 
five  or  six  months  later,  recited  that  $400,000  of  the  capital 
stock  in  the  proposed  "new  corporation"  should  be  issued 
to  the  "McNabb  Coal  and  Coke  Company  as  part  of  the 
purchase-price ;"  and  by  the  final  proposition,  under  which 
the  Consolidated  Coal  and  Iron  Company  claim  to  have  ac- 
quired the  whole  property,  the  $400,000  of  stock  provided 
"for  the  benefit  of  the  parities  interested  in  the  McNabb 
Company,"  was  to  be  held  "in  accordance  with  the  terms 
agreed  upon"  by  the  parties  to  the  option  contract,  which,  as 


VANCE  V.  McNABB  COAL  AND  COKE  CO.  853 

just  seen,  recited  that  it  should  go  to  the  "McNabb  Coal  and 
Coke  Company  as  part  of  the  purchase-price." 

Then,  treating  the  sale  and  purchase  of  the  property  as 
in  every  way  legitimate  and  binding,  the  $400,000  of  stock 
was  a  part  of  the  price  paid,  and,  as  such,  belonged  primarily 
to  the  selling  company,  and  not  to  its  share-holders  as  such. 
Therefore,  the  persons  receiving  and  appropriating  that  "stock 
were  guilty  of  a  conversion,  and  thereby  became  individually 
responsible  to  the  creditors  of  the  McNabb  Coal  and  Coke 
Company,  each  for  the  value  of  the  shares  taken  by  him. 

After  stating  that  equity  regards  the  property  of  a  cor- 
poration as  held  in  trust  for  the  payment  of  its  debts,  the 
Supreme  Court  of  the  United  States,  in  a  well-considered 
case,  said  :  "Assets  derived  from  the  sale  of  the  capital  stock 
of  the  corporation,  or  of  its  property,  become,  as  respects 
creditors,  the  substitutes  for  the  things  sold,  and,  as  such, 
they  are  subject  to  the  same  liabilities  and  restrictions  as  the 
things  sold  were  before  the  sale,  and  while  they  remained  in 
the  possession  of  the  corporation.  Even  the  sale  of  the  entire 
capital  stock  of  the  company,  and  the  division  of  the  proceeds 
of  the  sale  among  the  stockholders,  will  not  defeat  the  trust 
nor  impair  the  remedy  of  the  creditors,  if  any  debts  remain 
unpaid,  as  the  creditors,  in  that  event,  may  pursue  the  con- 
sideration of  the  sale  in  the  hands  of  the  respective  stock- 
holders, and  compel  each  one,  to  the  extent  of  the  fund,  to 
contribute  pro  rata  towards  the  payment  of  their  debts  out 
of  the  money  so  received  and  in  their  hands."  Railroad 
Company  v.  Hozvard,  7  Wallace,  410. 

To  the  same  effect  is  Carson  v.  State  of  Arkansas,  15 
Howard,  527;  2  Story's  Eq.  Jur.,  Sec.  1252,  and  other  au- 
thorities there  cited. 

But  complainants  are  entitled  to  more  comprehen- 
sive relief  than  any  yet  mentioned.  The  deed  and  other  con- 
tracts by  which  the  McNabb  Coal  and  Coke  Company  under- 
took to  pass  the  title  to  all  its  property  to  the  Consolidated 
Coal  and  Iron  Company  are  fraudulent  and  void  as  against 
creditors  of  the  former  company. 


854  FRAUD  ON  CREDITORS  OF  CORPORATION 

The  Consolidated  Coal  and  Iron  Company  was  or- 
ganized by  the  sanction  and  concurrence,  if  not  solely  at  the 
instance,  of  the  officers  of  the  McNabb  Coal  and  Coke  Com- 
pany, for  the  express  and  single  purpose  of  acquiring  the 
latter's  property ;  and  the  transition  was  soon  accomplished, 
mainly  through  the  efforts  of  those  same  officers,  who,  in 
the  meantime,  had  become  directors  in  the  other  company. 

Moreover,  the  Consolidated  Coal  and  Iron  Company 
did  not  pay,  or  assume  to  pay,  anything  for  all  this  valuable 
property,  save  the  nominal  consideration  of  one  dollar. 
True,  it  bound  itself  to  issue  a  small  part  of  its  stock  to  the 
McNabb  Coal  and  Coke  Company,  but  that,  under  the 
facts  of  this  case,  did  not  constitute  a  valid  consideration, 
or  relieve  the  transfer  of  the  just  imputation  of  fraud;  for 
the  only  basis  of  its  stock  was  the  property  received  from 
the  McNabb  Coal  and  Coke  Company.  That  stock  had 
nothing  else  to  rest  upon  or  to  give  it  value ;  from  no  other 
source  did  the  Consolidated  Coal  and  Iron  Company  receive 
a  dollar  of  capital  either  in  money  or  property.  At  best,  it  is 
but  an  effort  to  make  a  sale  whereby  the  purchase-price  is 
to  be  paid  by  a  return  to  the  seller  of  a  small  part  of  the 
property  sold,  and  the  buyer  is  to  retain  the  larger  part  and 
pay  nothing  for  it. 

The  president  of  the  McNabb  Coal  and  Coke  Company 
says  the  consideration  received  by  that  company  for  its  prop- 
erty was  the  different  sums  of  $60,000,  $35,000,  and 
$20,000,  paid  by  C.  W.  Short.  But  that  cannot  be  so ;  first, 
because  the  deed  was  executed  long  before  he  paid  those 
sums,  and  upon  an  entirely  different  consideration;  and, 
secondly,  because  he  made  those  payments  as  the  consider- 
ation for  the  $115,000  of  bonds  purchased  by  him.  The 
only  connection  those  payments  had  with  the  sale  of  property 
to  the  Consolidated  Coal  and  Iron  Company  lies  in  the  fact 
that  he  received  of  that  company's  stock  a  bonus  of 
$200,000,  by  previous  agreement  witli  McNeal  and  Donohue 
as  owners  of  an  option,  which  was  never  made  a\ailable, 
except  as  to  the  sale  of  the  bonds. 


VANCE  V.   McNABB  COAL  AND  COKE  CO.     855 

The  truth  is,  that  by  a  series  of  unusual  offers  and 
agreements,  one  corporation,  while  largely  indebted  and 
without  providing  for  its  creditors,  has,  without  a  valid  con- 
sideration, denuded  itself  of  all  its  property,  and  vested  the 
same  in  another  corporation,  conceived  and  brought  into 
existence  for  the  sole  purpose  of  such  successorship. 

A  transaction  of  that  kind  will  not  stand  for  a  moment 
against  creditors  of  the  former  corporation,  but  they  may 
follow  and  subject  the  property  in  the  hands  of  the  latter 
corporation,  the  same  as  if  no  transfer  had  been  made.  Only 
the  rights  of  subsequent  innocent  purchasers  for  value  can 
intervene  and  prevent  that  result. 

This  is  a  familiar  principle  of  law  with  reference  to 
fraudulent  conveyances,  applicable  to  corporations  and  in- 
dividuals alike : 

"Corporations  cannot,  any  more  than  individuals,  re- 
lieve their  property  from  the  payment  of  debts,  except  by  a 
sale  and  transfer  in  good  faith,  and  for  a  full  consideration." 
Rorke  V.  Thomas,  56  N.  Y.,  563;  Wabash,  St.  Louis  & 
Pacific  Railzvay  Co.  v.  Ham,  114  U.  S.,  594;  2  Morawetz 
on  Private  Corporations    (2nd  Ed.),   Sec.  789. 

"Equity  regards  the  property  of  a  corporation  as  held 
in  trust  for  the  payment  of  the  debts  of  the  corporation,  and 
recognizes  the  right  of  creditors  to  pursue  it  into  whosesoever 
possession  it  may  be  transferred,  unless  it  has  passed  into  the 
hands  of  a  bona  fide  purchaser."  Railroad  Company  v. 
Howard,  7  Wallace,  409;  Carson  v.  State  of  Arkansas,  15 
Howard,  507;  Graham  v.  Railroad  Company,  102  U.  S., 
161;  2  Story's  Eq.  Tur.,  Sec.  1252;  Wait  on  Insolvent 
Corporations,  Sees.  150  and  156;  2  Morawetz  on  Pri- 
vate Corporations,  Sec.  789;  Chicago  Railway  Company  v. 
Chicago  Bonk.  134  U.  S.  287. 

In  Hibernia  Insurance  Company  v.  St.  Louis  and  Nezv 
Orleans  Transportation  Company  the  Court,  as  correctly 
stated  in  the  head-note,  held  that  "equity  will  not  permit  th? 
stockholders  in  one  corporation  to  organize  another,   and 


856  FRAUD  ON  CREDITORS  OF  CORPORATION 

transfer  all  the  corporate  property  of  the  former  to  the  latter, 
without  paying  all  the  corporate  debts;"  and  that,  "where 
such  a  transfer  is  made,  the  obligations  of  the  old  corpora- 
tion may  be  enforced  against  the  new  to  the  extent  of  the 
assets  received  by  it."     13  Fed.  Rep.,  516. 

In  another  case,  where  it  appeared  that  no  fraud  was 
intended  by  either  party,  the  Court  held  that  "a  new  corpora- 
tion which  takes,  as  owner,  all  the  property  and  assets  of  an 
old  corporation  (which  is  dissolved  without  providing  for  all 
its  debts),  must  pay  the  debts  of  the  old  corporation,  at  least 
to  the  amount  of  the  assets  converted."     16  Fed.  Rep.,  140. 

Though  the  transfer  of  its  property  by  the  McNabb 
Coal  and  Coke  Company  was  inoperative  and  void  as  to  com- 
plainants, they  are  not  entitled  to  a  sale  under  their  at- 
tachment, because  the  proof  discloses  the  existence  of 
a  mortgage  upon  the  attached  property  prior  in  date  to  the 
filing  of  the  bill,  and  the  mortgagee  is  not  before  the  Court. 
The  validity  of  the  mortgage  is  not  impeached  in  the  bill. 
In  fact,  its  existence  seems  not  to  have  been  known  to  com- 
plainants until  disclosed  in  the  proof,  and  they  did  not  then 
attack  it  by  amendment,  as  they  might  have  done  upon 
proper  ground. 

Complainants  may  elect  to  ratify  the  transfer  of  its 
property  by  the  McNabb  Coal  and  Coke  Company,  and  re- 
cover the  value  of  the  $400,000  of  stock  from  the  persons 
receiving  it ;  or  the\'  may  avoid  the  transfer  altogether,  and 
pursue  the  property  or  its  proceeds  in  the  hands  of  the  Con- 
solidated Coal  and  Iron  Company,  subject  to  any  rights  that 
may  have  been  acquired  by  subsequent  bona  fide  purchasers 
for  value. 

Enter  decree  in  accordance  with  this  opinion,  and  al- 
low sixty  days  for  defendants  to  pay  into  this  Court  the 
amount  of  debts  adjudged,  with  interest  and  costs.  If  such 
payment  should  not  be  so  made,  the  cause  will  be  remanded 
for  further  appropriate  proceedings. - 

"  Compare :     Railroad    Company    v.    Howard.  74  U.    S.    302.    1868. 


VANCE  V.  McNABB  COAL  AND  COKE  CO.  857 

(The  A  Company  was  not  worth  $5,500,000.  Its  mortgages  amounted 
to  $7,000,000,  and  it  had  other  debts.  An  agreement  was  made  be- 
tween the  A  Company,  the  B  Company,  the  stockholders  of  the  A 
Company  and  the  bondholders  of  the  A  Company,  that  the  B  Com- 
pany would  pay  $5,500,000  for  the  property  of  the  A  Company ;  that 
the  different  bondho.lders  would  receive  from  100  to  30  per  cent,  of 
their  claims,  and  the  stockholders  of  the  A  company  16  per  cent,  of 
the  face  value  of  their  stock.  The  offer  of  the  B  Company  was  con- 
ditional on  rapid  delivery  of  a  good  title  and  the  method  proposed 
was  the  only  one  that  all  parties  interested  could  agree  on.  C,  a 
judgment  creditor  of  the  A  Company,  brought  a  bill  in  equity  for 
payment  of  the  money  which  was  to  go  to  the  stockholders.  Court 
decreed  that  this  money  should  not  be  paid  to  the  stockholders,  but 
to  a  receiver  for  the  benefit  of  the  creditors,  even  though  had  fore- 
closure of  the  mortgages  proceeded  in  regular  course  the  unsecured 
creditors   would   have   received   nothing.) 

The  Missouri  Lead  Mining  and  Smelting  Co.  v.  Reinliard,  114 
Mo.  218,  1892.  (The  A  Company  assigned  all  its  property  to  the  B 
Company,  the  consideration  being  stock  of  the  B  Company,  which  was 
distributed  among  the  stockholders  of  the  A  Company.  Persons  not 
stockholders  of  the  A  Company  at  the  same  time  subscribed  and  paid 
for  the  remaining  stock  of  the  B  Company.  At  the  time  of  the  assign- 
ment no  provision  was  made  for  a  disputed  claim  of  C's  against  the 
A  Company,  but  the  assignment  was  not  an  effort  to  avoid  paying  this 
claim.  Five  years  afterwards  C  secured  a  judgment  on  this  claim 
against  the  A  Company.  Held,  that  C  had  no  right  to  have  the  assign- 
ment set  aside,  but  that  as  the  B  Company  purchased  with  knowledge 
of  C's  claim,  in  equity  the  B  Company  was  liable  for  C's  claim.) 

For  oilier  cases  on  conveyances  made  when  insolvent  or  in  con- 
templation of  insolvency,  see  Amer.  Dig.,  tit.  corporations  Key,  No.  524; 
12  Cent.  Dig.,  tit.  corporations.  Sees.  2154-2160. 

A  general  discussion  of  the  "Trust  Fund  Theory"  by  one  of  the 
editors  (G.  W.  P.)  will  be  found  in  American  Law  Register  and  Re- 
view. (Now  University  of  Pennsylvania  Law  Review),  Vol.  43  (Vol. 
34  N.  S.),  p.  448,  456,^;  secj.  (1895). 


CHAPTER  XIV. 


PROBLEMS  OF  SET  OFF. 


SECTION   I.— PARTNERSHIP  CASES. 


SLIPPER  V.  STIDSTONE. 
In  the  Court  of  King's  Bench,  1794. 

5  Term  Reports,  493. 

To  this  action  for  work  and  labour  done  by  the  bank- 
rupt, goods  sold  and  delivered,  and  money  lent  by  him,  the 
defendant  pleaded  the  general  issue,  and  gave  a  notice  of 
set-off  for  work  and  labour  of  the  defendant  and  one  P. 
Abbot  since  deceased,  whom  the  defendant  survived,  by 
them  performed  for  the  bankrupt,  &c.  At  the  trial  before 
Lord  Kenyan,  the  sum  set  off  exceeded  the  plaintiff's  de- 
mand, upon  which  the  plaintiff  was  nonsuited,  though  it  was 
contended  on  his  behalf  that  the  set-off  was  in  autre  droit, 
and  ought  not  to  be  allowed  in  this  action. 

Law  on  a  former  day  in  this  term  moved  to  set  aside 
the  nonsuit,  contending  that  the  set-off  should  not  have  been 
allowed,  for  that  there  was  no  mutuality  of  debt;  that  the 
fund  out  of  which  the  satisfaction  was  to  be  made  by  the 
plaintiff  to  the  defendant  as  surviving  partner,  was  not  the 
same  as  that  from  which  satisfaction  was  to  be  made  to  the 
plaintiff  by  the  defendant;  that  the  only  mutuality  here  con- 
sisted in  the  persons  of  the  plaintiff  and  defendant;  that 
before  the  death  of  Abbot  it  could  not  be  pretended  that  the 
debt  due  from  the  plaintiff  to  him  and  the  defendant  could 
be  set  off  in  an  action  against  the  defendant;  and  that,  on 

(858) 


SLIPPER  V.  STIDSTONE  859 

principle,  the  death  of  Abbot  could  not  vary  this  question. 
That  this  set-off  could  not  be  permitted  any  more  than  a  debt 
due  from  the  plaintiff  to  any  person  to  whom  the  defendant 
happened  to  be  executor;  and  that  if  this  set-off  were 
allowed,  it  would  create  confusion  in  the  arrangement  of 
the  costs  of  the  different  suits. 

The  Court  then  granted  a  rule  nisi:  but  on  this  day  tliey 
recommended  it  to  the  plaintiff  not  to  draw  up  the  rule,  as 
it  would  only  enhance  the  expence  of  the  suit,  the  question 
being  perfectly  clear  with  the  defendant.  They  said  that 
the  defendant  might  have  declared  against  the  plaintiff 
for  this  demand,  and  also  for  any  sum  due  to  him  sepa- 
rately, if  any  such  had  been  due;  and  that  therefore  there 
was  no  reason  why  the  set-off  should  not  be  allowed. 

Rule  refused. 


860  PROBLEMS   OF  SET  OFF— PARTNERSHIPS 


FRENCH  v.  ANDRADE. 
In  the  Court  of  King's  Bench,  1796. 

6  TcDii  Reports,  582. 

This  was  an  action  upon  promises;  to  which  the  de- 
fendant pleaded  that  the  plaintiff  and  one  /.  Newton  who 
died  before  the  commencement  of  the  action  were  indebted 
to  the  defendant  in  divers  sums  of  money,  &c.,  for  work  and 
labour,  money  paid,  «&c. ;  that  those  sums  remained  unpaid 
at  the  death  of  /.  Newton,  and  at  the  time  of  commenc- 
ing this  actiori  were  and  still  are  due  from  the  plaintiff  to 
the  defendant;  and  that  they  exceed  the  sum  due  from  the 
defendant  to  the  plaintiff,  against  which  sum  the  defendant 
is  willing  to  set-off,  &c. 

To  this  plea  there  was  a  general  demurrer. 

Marryat,  in  support  of  the  plea,  mentioned  the  case  of 

Slipper  V.  Stidstone  as  decisive  of  the  present;  which 

Wood  contra  admitted. 

Per  Curiam.  It  is  perfectly  clear  that  the  debt  due 
from  the  plaintiff  as  surviving  partner  may  be  set-off  against 
the  demand  he  has  in  his  own  right  on  the  defendant. 

Judgment  for  the  defendant. 


) 


ADDIS  V.  KNIGHT  861 


ADDIS  V.  KNIGHT. 

In  the  High  Court  of  Chancery,  Before  Sir  William 

Grant,  Master  of  the  Rolls,  1817. 

2  Merivale's  Reports,  117. 

Joshua  Knight,  deceased,  carr}^ing  on  trade  in  partner- 
ship with  his  brother,  the  Defendant  Edward  Knight,  on  the 
i8th  of  August,  1801,  shortly  after  the  marriage  of  his 
daughter  with  the  Plaintiff,  advanced  to  the  Plaintiff  £1200, 
on  his  bond,  payable  to  Joshua  Knight,  his  Executors,  &c. 

During  the  partnership,  which  continued  to  the  death 
of  Joshua,  and  up  to  the  time  of  his  death,  the  partners  were 
in  the  habit  of  drawing  bills  upon  the  Plaintiff  for  their 
accommodation,  which  bills  the  Plaintiff  always  accepted, 
without  any  valuable  consideration,  on  the  credit  (as  he 
alleged)  of  his  father-in-law,  and  in  the  confidence  that  he 
could  set  off  at  any  time  to  the  amount  of  his  bond. 

Joshua  Knight  died  in  June,  1809,  having  made  his 
will,  and  appointed  the  three  Defendants  his  executors,  who 
proved  the  same. 

On  the  23d  of  the  same  month,  a  commission  issued 
against  the  Defendant  Edzvard  Knight,  as  surviving  part- 
ner; under  which  he  was  declared  bankrupt,  and  an  assign- 
ment made  of  his  separate  estate,  and  also  of  the  partner- 
ship estate. 

At  the  time  of  Joshua's  death,  and  of  the  commission 
issued,  the  partnership  was  indebted  to  the  Plaintiff  £8029 
in  respect  of  his  acceptances,  of  which  £5983  it,s.  was  dis- 
counted at  the  Bank,  and  the  remaining  £2045  7^-  P^^id  away 
by  the  partnership,  the  whole  of  which  the  Plaintiff  was 
then  liable  to  pay,  and  afterwards  actually  paid,  to  the  hold- 
ers of  those  bills  upon  application  made  to  him. 

The  Plaintiff  proved  the  £2045  7^-  under  the  commis- 
sion on  the  joint  estate;  and  the  Bank  were  admitted  to 


862  PROBLEMS  OF  SET  OFF— PARTNERSHIPS 

prove  in  joint  exoneration  of  the  Plaintiff's  liability  upon 
the  several  other  acceptances,  to  the  amount  of  £5983  13^. 
Dividends  were  received  on  both  proofs,  by  which  the  sum 
proved  by  the  Plaintiff  was  reduced  to  £1840  15^.  6d.,  and 
that  proved  by  the  Bank  to  £5385  6^.  lod.  amounting  in 
all  to  £7226  5^".  4d.j  remaining  due  to  the  Plaintiff  from  the 
partnership. 

The  joint  estate  being  insufficient  to  pay  any  further 
dividend,  the  Assignees  under  the  Commission  filed  a  Bill, 
on  behalf  of  themselves  and  all  other  the  joint  creditors  of 
the  partnership  who  should  come  in  and  contribute,  against 
the  present  Defendants  as  executors,  and  other  persons  hav- 
ing beneficial  interests  under  the  will  of  JosJuia  Knight, 
claiming  (among  other  things,)  to  be  paid  the  remainder 
of  their  debts  out  of  the  real  and  personal  estate  of  the 
Testator,  after  payment  of  his  separate  creditors,  and  call- 
ing upon  them  to  account  for  the  same. 

By  the  Decree  at  the  Rolls,  on  the  26th  of  January, 
1812,  it  was  referred  to  the  Master  to  take  an  account  of 
the  partnership  debts,  and  it  was  ordered  that  the  residue 
of  the  Testator's  personal  estate,  after  payment  of  his  sepa- 
rate debts,  should  be  applied  in  payment  of  such  partnership 
debts  as  should  remain  unsatisfied  after  applying  the  whole 
partnership  estate  in  liquidation  thereof,  and,  in  case  the 
personal  estate  should  prove  insufficient,  then  the  Testator's 
real  estate  was  declared  to  be  liable,  under  the  statute,  to 
make  good  the  deficiency,  and  an  account  thereof  was  also 
directed. 

Under  this  Decree,  the  Plaintiff  proved  before  the  Mas- 
ter the  balance  of  £1840  15^.  6d.  remaining  due  on  his 
proof  under  the  commission;  but,  depending  upon  the  Bank 
for  carrying  in  before  the  Master  the  £5385  6^'.  lod.,  which 
was  the  balance  due  on  the  unsatisfied  acceptances,  in  fur- 
ther exoneration  of  his  liability,  confined  his  proof  to  the 
former  sum,  and  was  called  upon  by  the  Bank  to  pay,  and 
had  since  actually  paid,  the  amount  of  those  acceptances. 


ADDIS  V.  KNIGHT  863 

Under  these  circumstances,  the  Plaintiff,  being  in- 
debted to  the  estate  of  Joshua  Knight  £1465,  for  principal 
money  and  interest  on  his  bond,  claimed  a  set-off  for  that 
amount  on  the  £1840  15^,  6d.  proved  by  him;  but  the  Master 
refused  to  admit  the  claim;  and  the  Plaintiff  afterwards, 
understanding  that  it  was  the  intention  of  the  Defendants 
(the  representatives  of  Joshua  Knight)  to  bring  an  -action 
against  him  on  the  bond,  filed  the  present  Bill,  by  which  he 
prayed  an  injunction  from  proceeding  on  the  bond,  and  a 
declaration  that  he  was  entitled  to  have  the  bond  and 
interest  deducted  from  or  set  off  against  the  £5385  6^.  lod. 
due  from  the  estate  of  Joshua  Knight,  and  to  receive  pay- 
ment or  satisfaction  in  respect  of  the  residue  out  of  his 
assets,  and  that  he  might  be  admitted  to  prove  the  same 
against,  or  be  directed  to  be  paid  the  same  out  of,  the  said 
assets  accordingly;  for  an  account,  if  necessary;  and  that 
the  bond  might  be  delivered  up  to  be  cancelled. 

The  Defendants,  by  their  answers,  submitted  whether 
the  debt  due  from  the  joint  estate  to  the  Plaintiff  was  or 
was  not  a  debt  which  ought  to  be  considered  due  from  and 
payable  out  of  the  assets  of  Joshua  Knight  only,  contending 
that  the  debt  due  from  the  Plaintiff  was  a  separate  debt  due 
and  payable  to  the  separate  estate  of  Joshua  Knight,  and 
that  the  Plaintiff  was  not  entitled  to  set  off  the  bond-debt 
and  interest  against  the  said  sum  of  £5385  6^.  lod.,  but 
ought  to  pay  the  amount  of  principal  and  interest  on  the 
bond,  upon  payment  whereof  he  would  be  entitled  to  receive 
his  dividend  upon  so  much  as  had  been  actually  paid  by 
him,  rateably  with  the  other  creditors. 

Hart  and  Rose,  for  the  Plaintiff. 

Admitting  that  the  debt  secured  to  Joshua  Knight  by 
the  Plaintiff's  bond  remained  due  at  law,  and  might  be 
recovered  by  the  representatives  of  Joshua  Knight  in  an 
action,  and  that  the  debt  due  from  the  joint  estate  of  Joshua 
and  Edward  Knight  to  the  Plaintiff  was  extinguished  at 
law  as  against  Joshua  by  his  death,  and  survived  against 


864  i'RC^I'.I.F.MS   OF  SET  OFF— P.XRTNERSHTPS 

Edward  only ;  contended  that  it  nevertheless  remained  due 
in  equity  against  the  assets  of  Joshua,  and  that  the  Plaintiff 
had  a  right,  in  a  Court  of  Equity,  to  be  relieved  against 
legal  proceedings  at  the  suit  of  Joshuas  representatives, 
while  his  equitable  demand  remained  unsatisfied;  and,  in 
support  of  this  argument,  they  cited  Stephenson  v.  Chiswell, 
(3  Ves.  566),  Gray  v.  Chiswell  (9  Ves.  118),  and  Ex  parte 
Quintin  (3  Ves.  248),  Ex  parte  Stephens  (11  Ves.  24), 
and  Ex  parte  Hanson  (12  Ves.  346,  and  see  8  Ves.  232,  i 
Rose,  156  and  Bradley  v.  Miller,  i  Rose,  273),  alleging  that 
the  first-mentioned  case  established  the  doctrine  for  which 
they  contended,  and  that  its  principle  was  not  contravened 
by  any  of  the  later  decisions  referred  to. 

Sir  5.  Romilly,  Leach,  and  Barber,  for  different  De- 
fendants. 

The  Master  of  the  Rolls  : 

Upon  looking  into  the  cases  which  have  been  cited  in 
support  of  the  Plaintiff's  demand,  that  of  Stephenson  v. 
Chiswell,  is  the  onl}^  one  which  I  find  to  be  applicable ;  and, 
in  the  result,  that  case  appears  to  be  rather  against  the  claim 
than  in  favour  of  it;  for  the  demurrer  was  allowed.  The 
cases  of  Ex  parte  Stephens,  and  Ex  parte  Hanson,  only  es- 
tablish that,  under  certain  circumstances,  there  may  be  a 
set-off  in  Equity  when  there  can  be  none  at  Law.  But  it  is 
quite  clear  that,  as  at  Law  a  joint  cannot  be  set  off  against  a 
separate  demand,  the  same  rule  prevails  in  Equity,  and  must 
continue  to  prevail  so  long  as  the  present  system,  in  regard 
to  joint  and  separate  estates,  subsists. 

The  case  of  Ex  parte  Quintin,  may  be  considered  as  an 
exception;  but  in  Ex  parte  Twogood  (11  Ves.  517,  519), 
the  present  Lord  Chancellor  expresses  his  disapprobation  of 
that  decision. 

It  is  difficult  to  discover  what  was  the  precise  equity 
sought  in  the  case  of  Stephenson  v.  Chisivell.  The  Plaint- 
iffs there  claimed  to  retain  their  own  debt  until  they  should 
be  divested  of  it  by  somebody  having  a  better  right  to  it 


ADDIS  t'.  KNIGR.'  865 

than  themselves.  But  it  is  difficult  to  say  what  they  would 
have  considered  a  better  equity  than  their  own.  Lord  Ross- 
lyn,  it  is  true,  uses  some  expressions  which  appear  to  be  in 
favour  of  the  present  application;  but  the  demurrer  was  to 
the  whole  relief  sought,  and  its  being  allowed,  was  a  refusal 
of  that  relief  in  any  part  and  to  any  extent. 

According  to  the  scope  of  the  argument,  there  would 
be  hardly  any  rule  by  which  the  right  of  set-off  can  be  as- 
certained. The  criterion  of  set-off  is  supposed  to  be  the 
purpose  to  which  the  debt  is  intended  to  be  applied ;  since, 
if  it  is  wanted  for  the  payment  of  separate  creditors,  the 
Plaintiff  does  not  pretend  any  right  to  retain ;  he  claims  to 
be  entitled  only  in  respect  of  its  intended  application  to  the 
payment  of  joint  creditors.  But  he  is  not  called  upon  to 
pa}^  this  debt,  in  the  same  character  in  which  he  would  re- 
ceive, as  a  joint  creditor.  His  right  is  not  co-extensive  with 
his  obligation.  His  obligation  is  to  pay  the  whole ;  his  right 
is  to  receive  only  a  part;  namely,  his  proportionate  dividend 
with  the  other  joint  creditors. 

Bill  dismissed  with  costs.^ 


^  But  even  at  law  a  person  who  is  sued  by  one  may  set  off  a  point 
and  several  obligation  of  the  plaintiff  and  another  to  him.  Owen  v. 
Wilkinson,  5  C.  B.  N.  S.  526,  1858. 


^66  PROBLEMS  OF  SET  OFF— PARTNERSHIPS 

WALN  V.  HEWES. 
In  the  Supreme  Court  of  Pennsylvania,  1820. 

5  Sergeant  and  Rawle's  Reports,  468. 

This  suit  was  brought  by  Robert  Wain,  surviving  part- 
ner of  Jesse  Wain  against  Josiah  Hewes  and  others,  execu- 
tors of  Joseph  Anthony  deceased,  in  which  a  verdict  had 
been  found  for  the  plaintiff  against  Hewes,  for  the  sum  of 
970  dollars  39  cents,  and  judgment  had  been  entered  thereon, 
A  motion  was  now  made  on  behalf  of  Hewes,  for  a  rule  on 
the  plaintiff  to  shew  cause,  why  the  amount  of  the  judg- 
ment in  this  case  should  not  be  defalked  out  of  a  judgment 
obtained  by  Hewes  against  Robert  Wain,  in  a  suit  brought 
in  this  Court  to  the  present  Term,  for  the  sum  of  5143  dol- 
lars y2f  cents.  Hezves  was  the  only  executor  of  Anthony 
who  had  assets,  and  he  had  paid  them  all  over  to  the  lega- 
tees of  Anthony,  at  a  time  when  there  was  not  the  least 
expectation  of  claims  by  creditors,  without  taking  securitv 
The  ground  of  recovery  against  him  in  this  as  well  as  in 
other  suits  to  a  large  amount,  was  an  alleged  fraud  com- 
mited  by  Anthony,  on  several  insurances  of  a  ship  in  the 
year  1795.  The  plaintiff,  Robert  Wain,,  had  executed  a  gen- 
eral assignment  in  trust  for  his  creditors,  on  the  13th  Sep- 
tember, 1809.^ 

Gibson,  J. : 

The  judgment  now  attempted  to  be  defalked,  was  ob- 
tained against  the  plaintiff,  not  as  a  surviving  partner,  but 
for  his  separate  debt.  At  law,  it  is  clear,  the* remedy  to 
recover  on  choses  in  action  belonging  to  the  partnership, 
survives;  and  the  surviving  partner  may,  therefore,  set-off 
a  debt  due  to  him  as  such,  against  a  demand  on  him  in  his 
own  right.  Slipper  v.  Lane,  5  Term  Rep.  493 :  so  the  de- 
fendant may  set-off  a  debt  due  by  the  plaintiff  as  surviving 
partner,  against  a  demand  due  to  him  in  his  own  right. 

*  The   Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 
(IS  also  the  firgt  part  of  the  opinion,  by  Gibson,  J. 


WALN  z:  HEWES  867 

French  v.  Andrade,  6  Term  Rep.  528.  So  far  the  rights  of 
the  representatives  of  the  deceased  partner,  and  of  the  part- 
nership creditors,  are  not  affected.  Where  the  siirvdving 
partner  is  a  defendant  he  may  set-off  a  partnership  claim, 
because  as  resj^jects  the  plaintiff  he  may  treat  it  as  his  own: 
so  where  a  person  who  is  a  surviving  partner  sues  for  his 
separate  debt,  the  defendant  may  set-off  a  partnership  debt 
against  it.  But  there  is  no  case  to  shew,  that  where  the  suit 
is  for  a  debt  due  to  the  partnership,  the  defendant  can  set- 
off a  debt  separately  due  by  the  plaintiff ;  for  though  a  sur- 
viving partner  may  chose  to  treat  a  partnership  debt  as  due 
to  him  in  his  own  right,  it  does  not  follow  that  a  defendant 
sued  for  a  debt  separately  due  has  a  correspondent  right ; 
and  even  if  he  had  such  a  right  at  law,  I  have  no  doubt 
chancery  would,  if  the  surviving  partner  were  insolvent, 
interfere  to  prevent  it  from  being  exercised ;  and  this  on 
the  same  ground  that  it  interferes  to  prevent  an  insolvent 
surviving  partner  from  disposing  of  the  stock,  or  getting  in 
the  outstanding  debts ;  as  was  done  in  Hartz  v.  Schroeder,  8 
Ves.  jun.  317.  Equity,  I  know,  will,  under  special  circum- 
stances, allow  a  set-off  where  none  can  be  at  law,  as  in 
Ex  parte  Stephens,  1 1  Ves.  jun.  24,  and  we  find  some  chan- 
cellors have  been  disposed  to  go  a  good  way  in  cases  not 
very  unlike  the  present.  In  Ex  parte  Edwards,  i  Atk.  100, 
Lord  Hardwicke  inclined,  under  circumstances  of  extreme 
hardship,  to  suffer  the  separate  debt  of  one  of  the  partners 
to  be  defalked  from  a  debt  due  to  both  jointly :  but  what 
finally  became  of  the  cause  does  not  appear,  and  we  there- 
fore cannot  tell  what  terms  he  had  in  view.  And  in  Ex 
parte  Quinten,  3  Ves.  jun.  248,  a  separate  commission  hav- 
ing issued  against  one  of  the  partners,  and  the  other  having 
paid  the  joint  debts,  a  debtor  to  the  partnership,  who  was 
also  a  creditor  of  the  l^ankrupt,  was  permitted  to  set-off 
against  the  bankrupt's  share  of  the  joint  debt,  and  to  prove 
for  the  residue  of  his  demand,  the  solvent  partner  consent- 
ing to  receive  only  his  proportion  of  the  debts  due  to  the 


868  PROBLEMS  OF  SET  OFF— PARTNERSHIPS 

partnership.  But  in  Ex  parte  Twogood,  ii  Ves.  jun.  587, 
this  case  was,  as  I  take  it,  overruled,  where  set-off  was 
denied  under  circumstances  in  all  respects  similar,  except 
that  the  solvent  partner  had  not  paid  the  joint  debts ;  but 
the  effect  of  that  circumstance  was,  in  Ex  parte  Quinten,  re- 
moved by  the  assent  of  the  solvent  partner  to  dispense  with 
any  right  arising  from  it.  However,  be  that  as  it  may, 
equity  will  never  allow  a  set-off  of  this  sort  without  taking 
special  care  that  no  injuiy  shall,  in  any  possible  event,  hap- 
pen to  the  rights  of  any  one  having  a  claim  on  the  partner- 
ship ;  and  in  doing  so,  chancery  has  facilities  by  directing 
the  accounts  to  be  taken  between  the  partnership  and  its 
creditors,  and  between  the  partners  themselves,  which  this 
Court  has  not.  A  chancellor  can  call  all  the  parties  in  inter- 
est before  him,  and  bind  them  by  a  decree,  that  will  do  com- 
plete justice  to  every  one :  our  equity  means  are  limited,  and 
for  some  purposes  miserably  deficient.  Here  we  can  im- 
pose no  conditions,  but  must  allow  the  set-off  absolutely  if 
at  all ;  and  to  do  so,  might  be  to  pay  a  debt  due  by  the  plaint- 
iff out  of  the  estate  of  his  solvent  partner,  or  out  of  the 
property  of  the  general  creditors.  It  does  not  appear, 
whether  the  joint  debts  are  paid,  or  whether,  if  the  accounts 
were  settled,  the  plaintiff  would  be  in  advance  to  the  con- 
cern. He  insists  he  is ;  but  that  is  denied  by  the  representa- 
tives of  the  deceased  partner,  and  on  a  motion  of  this  kind 
we  cannot  settle  the  account.  But  the  plaintiff  does  not  say 
the  partnership  creditors  are  paid,  and  until  that  be  done  it 
is  impossible  to  say  how  the  balance  may  fall.  Were  it 
even  certain  the  partners  stood  in  all  resepcts  equal,  still  no 
more  than  the  half  of  this  judgment  would  belong  to  the 
plaintiff,  and  be  a  subject  of  equitable  defalcation  by  his 
separate  creditors.  As  it  is,  the  money  recovered  here  will 
go  into  the  hands  of  the  plaintiff's* assignees,  subject,  in  the 
first  instance  to  all  the  rights  of  the  partnership ;  and  when 
the  joint  debts  are  paid  and  the  partnership  account  is  set- 
tled, but  not  till  then,   the  separate  creditors  will  have  a 


WALN  V.  HEWES  869 

claim  on  it :  whatever  may  then  remain  as  a  share  of  the 
plaintiff,  will  be  subject  to  his  separate  debts;  but  at  this 
stage  of  the  business,  we  cannot  interfere.  This  being  an 
application  to  our  discretion,  we  must  take  care  so  to  exer- 
cise it,  as  not  to  invade  the  rights  of  third  persons.  The 
defendant's  case  is  a  very  hard  one ;  but  the  motion  must  be 
denied. 

Motion  denied. - 


'Compare:  Gordon  v.  Ellis,  2  C.  B.,  820,  1846.  (To  assumpsit 
by  A.,  B.  and  C.  against  D.  for  money  had  and  received,  D.  pleaded, 
that,  before  the  money  had  been  received,  &c.,  the  plaintiffs  carried 
on  the  trade  of  founders  in  partnership ;  that,  while  they  were  such 
partners,  A.,  with  the  privity  and  concurrence  of  B.  and  C.,  employed 
D.,  an  auctioneer,  to  sell  certain  property  belonging  to  the  firm : 
that,  at  the  time  A.  so  employed  D.  to  sell  the  said  property,  and 
at  the  time  of  the  sale  thereof,  and  at  the  time  when  the  debt  after 
mentioned  became  due  from  A.  to  D.,  D.  believed  that  A.  was  the 
sole  and  exclusive  owner  of  the  property,  and  had  full  power  and 
authority  to  sell  the  same,  and  to  receive  the  proceeds  for  his  own 
sole  use,  D.  having  no  notice  or  knowledge  that  B.  and  C.  had  any 
right  or  interest  in  the  property ;  that,  after  A.  had  so  employed  D., 
and  before  D.  had  any  notice  that  A.  was  not  the  sole  and  exclusive 
ownei"  ol  the  property,  or  of  the  proceeds  thereof,  A.  became  in- 
debted to  D.  in  a  sum  exceeding  the  moneys  m  the  declaration  men- 
tioned, out  of  which  D.  was  read\^  and  willing  10  =;et  oif  and  allow  the 
sums  in  the  declaration  mentioned.  Held,  that  the  plea  was 
bad  inasmuch  that  it  did  not  allege  that  A  appeared  as  sole  owner 
of  the  property  with  the  assent  or  by  the  default  of  his  partners.  For 
a  case  in  which  the  person  dealing  w-ith  the  partner  was  deceived 
by  the  action  of  his  co-partners  into  believing  that  the  debt  was  due 
from  the  partner  separately,  and  the  set  off  was  allowed.  See  Ross  v. 
Deey,  7  T.  R.,  361,  note  C.) 

Billings  v.  Meigs,  53  Barb.  272,  1869  (A  and  B  were  partners.  They 
deposited  money  with  C.  C  at  the  request  of  A  transferred  part  of 
the  money  to  the  individual  account  of  A,  C  having  reason  to  know 
that  A's  request  was  in  fraud  of  B.  Held,  that  C  was  liable  to  B  for 
the  full  amount  deposited  by  the  firm.  i.  e.  he,  C,  could  not  set  off 
against  the  claim  of  the  partnership  his,  C's,  claim  against  A). 


870  PROBLEMS  OF  SET  OFF— PARTNERSHIPS 


STEWART  V.  COULTER. 
In  the  Supreme  Court  of  Pennsylvania,  1824. 

12  Sergeant  and  Rawle's  Reports,  252,  445. 

This  cause  was  tried  before  Mr.  Justice  Duncan,  at 
nisi  prills  in  April,  1824,  when  it  appeared  that  it  was  a  suit 
brought  by  Abraham  Stewart,  against  John  Coulter  and 
William  Day,  to  recover  a  compensation  for  services,  as 
supercargo  of  the  ship  Coromandel,  on  a  voyage  from  Phil- 
adelphia to  Antwerp,  thence  to  Java,  back  to  Antzverp,  and 
thence  to  Philadelphia.  The  ship  arrived  in  Philadelphia  in 
June  or  July,  1819,  and  on  the  i8th  of  August,  1819,  the 
plaintiff  executed  an  assignment  of  his  claim  to  A.  C.  Sal- 
aignac  and  Cornelius  Stevenson,  for  whose  use  the  suit  was 
brought.  On  the  trial,  Coidter  offered  to  set  off  a  judg- 
ment, which  he  had  obtained  against  Stewart,  long  prior  to 
his  assignment  to  Salaignac  and  Stevenson;  and  his  Honour 
having  admitted  the  set-off,  the  plaintiff  moved  for  a  new 
trial.  ^ 

Gibson,  J.  For  myself,  I  cannot  admit  that  this  set- 
off could  be  claimed  at  law,  or  that  there  is  in  this  respect 
any  material  difference  between  our  act  of  assembly,  and 
the  stat.  2  G.  2.  ch.  22.  But  whatever  difference  does  exist, 
is  against  the  set-off,  our  act  having  regard  to  cases  where 
a  balance  may  be  recovered  by  the  defendant,  and  it  cannot 
be  said  that  partners  may  recover  a  debt  separately  due  to 
one  of  them.  But  I  throw  this  out  only  as  my  own  opinion, 
and  as  we  all  agree  that  the  debt  due  by  Stewart  to  Coulter 
was  a  proper  subject  for  equitable  defalcation.  I  shall  rest 
the  opinion  o'f  the  court  on  that  ground  alone. 

It  is  undoubted,  that  chancery  held  jurisdiction  of  set- 


^  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted 
The  opinion  of  Duncan,  J.,  allowing  the  set  off  under  an  Act  of  As- 
sembly is  also  omitted. 


STEWART  V.  COULTER  871 

off  before  any  statute  on  the  subject  was  passed;  and 
although  a  bill  for  an  injunction  would  not  now  be  sus- 
tained, where  relief  may  be  had  at  law,  yet  for  the  partic- 
ular equity  chancery  will  go  beyond  the  terms  of  the  statute, 
whose  object  seems  to  have  been  the  convenience  of  suitors, 
in  enabling  the  common  law  courts,  in  the  generality  of 
cases,  to  afford  that  relief  which  before  was  obtained  only 
in  chancer}',  without  at  all  abridging  the  inherent  powers  of 
that  court  in  cases  not  within  the  statute.  It  is  remarked 
by  Chancellor  Kent,  in  Dale  v.  Cook,  4  Johns.  Ch.  13,  that 
the  cases  in  which  there  has  been  a  relaxation  of  the  rule 
which  forbids  a  set-off  between  joint  and  separate  debts,  are 
those  of  bankruptcy ;  and  that  it  is  said  the  chancellor's 
jurisdiction  relative  to  set-off  in  bankruptcy,  is  derived  from 
the  Stat.  13  Elis.  and  5  Geo.  2,  and  is  wholly  unconnected 
with  the  general  statute  of  set-off,  of  Geo.  2.  It  is  so.  But 
I  doubt  whether  this  relaxation  has  arisen  from  any  differ- 
ence between  the  particular  provisions  of  these  statutes ;  and 
whether  it  would  not  be  found  to  originate  in  the  inherent 
power  of  the  court,  exercised  in  conformity  to  the  pro- 
visions of  the  statute,  only  where  the  case  presented  no 
equity  beyond  the  statute;  but  exercised  where  it  did,  not 
for  the  sake  of  convenience,  but  to  prevent  an  absolute  fail- 
ure of  justice,  always  taking  care,  however,  that  the  inter- 
ests of  third  persons  be  not  jeoparded  by  the  relief  afforded 
in  the  particular  instance.  I  do  not  say,  however,  that  as 
a  matter  of  course  the  several  debt  of  one  defendant  can 
be  set  off  against  the  joint  debt  of  all,  even  in  equity.  In 
the  case  under  consideration,  one  of  the  defendants  pro- 
poses to  pay  the  debt  for  which  suit  is  brought,  out  of  his 
own  pocket,  and  there  is  therefore  no  reason  to  say  the  inter- 
est of  his  partner  is  involved,  particularly  as  his  partner  is 
also  a  defendant  and  assents  to  it.  Then,  what  is  the  par- 
ticular equitv  on  which  this  set-off  is  claimed?  The  suit 
against  the  defendants  is  brought  for  commissions  earned 
after  the  date  of  the  judgment,  which  is  proposed  to  be  de- 


872  PROBT^EMS  OK  SET  OFF— PARTNERSHIPS 

falked ;  and  Stezvart,  in  whose  name  it  is  brought,  assigned 
his  interest  in  it  to  the  present  plaintiff  a  month  before 
obtaining  a  discharge,  as  an  insolvent  debtor,  doubtless  with 
the  intention  of  eluding  this  claim  on  the  part  of  Coulter, 
one  of  the  defendants.  The  insolvency 'of  Stewart  alone, 
would  furnish  a  sufficient  equity  for  a  chancellor,  to  prevent 
him  from  getting  the  fruits  of  his  demand  into  his  hands, 
without  presenting  to  the  defendants  the  means  of  coercing 
the  payment  of  theirs.  But  this  is  not  all.  The  demand 
of  the  plaintiffs  arose  from  credit  given  chiefly,  if  not  en- 
tirely, to  the  defendant,  whose  separate  debt  is  set  against 
it,  and  who  was  treated  in  the  subsequent  transactions  of 
the  parties,  all  but  the  bringing  of  this  suit,  as  the  debtor 
substantially  liable;  and,  added  to  this,  about  the  same  time 
that  Stewart  obtained  the  benefit  of  the  insolvent  laws, 
Coulter  settled  with  Day,  his  partner  and  co-defendant,  paid 
him,  and  took  the  responsibility  arising  from  this  demand 
entirely  on  himself;  so  that  the  debt  for  which  the  defend- 
ants are  sued,  is  effectively  the  debt  of  Coulter,  and  nothing 
is  in  the  way  of  the  set-off  but  the  name  of  Day,  as  a  party 
of  record.  The  difficulty,  then,  is  only  one  of  form, — Stew- 
art and  Coulter  alone,  standing  substantially  in  the  relation 
of  debtor  and  creditor.  Would  there  not  then  be  an  abso- 
lute failure  of  justice,  in  permitting  assignees  who  stand  in 
no  better  equity  than  their  assignor  to  recover  against  part- 
ners, one  of  whom  would,  in  consequence,  be  left  to  the 
desperate  chance  of  obtaining  satisfaction  for  his  separate 
demand  from  the  assignor,  who  is  absolutely  insolvent? 
It  seems  to  me,  this  would  furnish  a  claim  to  relief  on 
grounds  of  general  equity,  which  no  chancellor  could  with- 
stand. In  such  a  case  even  a  court  of  common  law  would 
give  relief,  on  the  foot  of  its  common  law  jurisdiction  of 
setting  off  one  judgment  against  another.  Roberts  v.  Biggs, 
Bull.  N.  P.  336.  Mitchell  v.  Old  field,  4  Term  Rep.  123. 
The  only  thing  that  has  weighed  with  me,  is  a  doubt  whether 
that  course  ought  not  to  have  been  pursued  here.     But  in 


STEWART  V.  COULTER  873 

delivering  the  opinion  of  tlie  court  in  Wain  v.  Hewes,  5 
Serg.  &  Rawle,  470,  I  am  convinced  that  I  erred,  in  suppos- 
ing that  relief  could  in  no  case  be  had,  but  after  judgment. 
This  court  possesses  not  only  its  common  law  jurisdiction 
over  the  subject,  but,  in  virtue  of  its  chancery  powers,  the 
jurisdiction  of  a  court  of  equity,  and  may  therefore  afford 
more  extensive  relief  than  what  can  be  had  at  the  common 
law ;  and  there  is  beside  a  peculiar  fitness  and  convenience, 
in  going  into  the  inquiry  at  the  trial,  as  there  may  be  a 
variety  of  facts  such  as  the  insolvency  of  the  plaintiff, 
which  are  proper  for  the  decision  of  the  jury.  On  general 
grounds,  however,  I  am  clear  that  the  set-off  was  properly 
allowed,  and  the  rule  for  a  new  trial  must  therefore  be  dis- 
charged. 

Rule  discharged. - 


'^Accord:  Lewis  v.  Culhertson,  11  S.  &  R.  48,  1824.  (A  and  B 
were  partners.  A  and  B  were  indebted  to  C.  C  was  indebted  to  A. 
B  died.  C  sued  A  on  a  partnership  debt.  Held,  that  A  could  set  off 
the  debt  due  him  by  C.) 

Compare:  Watts  v.  Christie,  11  Beav.  546,  1849.  (A  and  B  were 
partners.  A  as  an  individual,  and  the  firm  had  accounts  at  a  bank. 
The  account  of  A  had  a  credit ;  the  account  of  the  firm  was  over- 
drawn. The  bank  stopped  payment.  A  assigned  his  credit  to  the 
firm.  The  bank  refused  to  transfer  the  account  of  A  to  the  credit 
of  the  firm.  The  bank  went  into  bankruptcy,  and  the  assignees  sued 
the  firm.  The  firm  brought  a  bill  in  equity  to  allow  them  to  set  off, 
against  the  claim  of  the  bank,  A's  claim  against  the  bank.    Refused.) 


874  PROHLEMS  OF  SET  OFF— PARTNERSHIPS 


TUSTIN  V.  CAMERON. 
In  the  Supreme  Court  of  Pennsylvania,  1839. 

5  Wharton's  Reports,  379. 

Error  to  the  District  Court  for  the  City  and  County 
of  Philadelphia. 

In  the  Court  below  John  Cameron  brought  an  action 
on  the  case  against  Thomas  Tustin  and  George  VV.  Harris, 
lately  trading  under  the  firm  of  Tustin  &  Harris,  upon  two 
promissoiy  notes,  dated  the  2d  of  October,  1838,  for  five 
hundred  and  fifty-three  dollars  each,  drawn  by  the  defend- 
ants in  favour  of  the  plaintiff;  one  payable  in  thirty  days, 
and  the  other  in  sixty  days  after  date. 

The  defendants  filed  the  following  affidavit  of  defence. 

"George  W.  Harris,  one  of  the  defendants  above  named, 
being  duly  sworn,  says : — The  above  named  defendants  have 
a  just  and  legal  defence  to  the  whole  of  the  plaintiff's  claim 
in  this  case,  the  nature  and  character  of  which  defence  are 
as  hereinafter  set  fortli.  Prior  to  and  on  the  4th  day  of 
November,  a.  d.  1838,  the  plaintiff  was,  and  has  ever  since 
continued  to,  be,  and  still  is  indebted,  to  a  firm  styled  the 
Western  Transportation  Company,  (consisting  of  the  above 
named  defendants  and  David  Leech,  Thomas  S.  Clark,  Wil- 
liam Little,  Thomas  Leuford,  James  Arthur,  and  Robert  S. 
Hays,)  in  the  sum  of  two  thousand  dollars  and  upwards, 
for  money  had  and  received  by  the  said  plaintiff,  before  the 
said  4th  day  of  November,  a.  d.  1838,  as  the  agent  of  and 
for  the  use  of  the  said  Western  Transportation  Company; 
by  all  the  members  of  which  the  defendants  are  expressly 
authorised  and  requested  and  do  therefore  claim  to  set  off 
against  the  plaintiff's  claim  in  this  suit,  so  much  of  his  said 
debt  to  the  said  Western  Transportation  Company  as  may 
be  necessary  to  extinguish  the  plaintiff's  said  claim." 

A  rule  to  show  cause  why  judgment  should  not  be 


TUSTIN  V.  CAMERON  875 

entered  for  want  of  a  sufficient  affidavit  of  defence,  was 
granted  by  the  Court ,  and  after  argument  the  rule  was  made 
absolute.  Whereupon  the  defendants  took  this  writ  of 
error. 

Per  Curiam. — This  case  has  every  feature  of  Wren- 
shall  V.  Cook,  except  the  plaintiff's  insolvency.  Such  a 
feature,  however,  is  not  an  essential  one;  though,  existing 
in  that  case,  it  was  stated  as  a  circumstance  to  make  the  ex- 
pediency of  a  set-off  more  apparent.  It  is  the  practicability 
of  avoiding  circuity  and  needless  costs  with  safety  and  con- 
venience to  all  parties,  which  determines  the  question  of  set- 
off:  and  an  increasing  liberality  has  greatly,  but  cautiously 
and  beneficially  enlarged  the  doctrine  within  a  few  years 
past.  Thus  in  Childerston  v.  Hammond.  (9  Serg.  &  Rawle, 
68,)  and  Stezvart  v.  Coulter,  (12  Serg.  &  Rawle,  252,)  a 
defendant  jointly  sued,  was  allowed  to  set  off  the  plaintiff's 
debt  separately  due  to  himself;  a  superior  equity  in  a  third 
person  not  being  in  the  way.  Is  not  that  the  converse  of 
our  case,  in  which  a  defendant  separately  sued  proposes  to 
set  off  a  partnership  debt  with  the  assent  of  his  partners  ? 
In  Henderson  v.  Lezvis,  (9  Serg.  &  Rawle,  379,)  a  debt  due 
to  the  plaintiff  by  a  co-obligor  sued  but  not  summoned,  was 
not  allowed  to  be  set  off  with  the  co-obligor's  assent,  only 
because  he  was  effectively  a  stranger  to  the  action;  and  a 
third  person  is  never  suffered  to  make  it  a  medium  of  re- 
covery by  cross  action,  without  risk  of  costs.  That  is  very 
different  from  a  recovery  of  the  defendant's  own  demand 
with  the  license  of  those  who  have  a  concurrent  interest  in 
it.  Such  is  a  partnership  cross  demand;  and  it  is  ground 
of  defence  here. 

Judgment  reversed  and  a  procedendo  awarded. 


876  PROBLEMS  OF  SET  OFF— PARTNERSHIPS 


SMITH  V.  PARKES. 

In  the  High  Court  of  Chancery,  Before  Sir  John 
RoMiLLY^  Master  of  the  Rolls,  1852. 

16  Beavan's  Reports,  115. 

In  1845,  3-  partnership  which  had  previously  existed 
between  Smith,  Parkes  and  Brookfield  was  dissolved,  and 
by  the  deed  of  dissolution,  dated  the  7th  of  April,  1845,  3"<^ 
subject  to  certain  deductions  therein  mentioned,  Parkes  was 
entitled  to  receive  from  Smith  and  Brookfield  5,750/.  for 
the  good  will,  and  2,125/.  fo^  ^^''s  share  of  the  profits.  Wit- 
ham  thereupon  joined  the  partnership. 

On  the  30th  of  April,  1845,  P^^^kes  agreed  to  assign 
the  interest  which  he  took  under  this  deed  to  the  Defend- 
ants Lucena  and  others.  Disputes  afterwards  arose  between 
Smith,  Parkes  and  Brookfield,  and  in  December,  1845, 
bonds  were  given  by  Smith  and  Brookfield  to  secure  the 
amount  due  to  Parkes,  and  which  he  deposited  in  like 
manner  for  the  benefit  of  Lucena  and  the  persons  interested 
under  the  former  agreement  of  the  30th  of  April.  Actions 
were  subsequently  brought  in  the  name  of  Parkes  on  the 
bonds,  but  on  the  23rd  of  December,  1846,  an  arrangement 
was  come  to  between  the  continuing  partners  and  Parkes, 
by  a  deed  dated  the  23rd  of  December,  1846,  whereby 
Smith,  Brookfield  and  Witham  covenanted  to  pay  the  sums 
therein  mentioned.  This  deed  was  given  in  substitution  for 
the  former  deeds  and  bonds,  Lucena  and  the  others  in  the 
same  interest  accepted  this  deed  of  1846  in  lieu  and  sub- 
stitution of  the  former  securities,  and  the  actions  which  had 
been  previously  bought  by  them  in  the  name  of  Parkes  on 
the  bonds  were  discontinued. 

Fresh  difficulties  afterwards  arose  under  the  deed  of 
1846,  which  were  determined  by  arbitration. 

In  1848,  Smith,  by  the  death  of  Witham  and  the  in- 


SMITH  V.  PARKES  877 

solvency  of  Brookfield,  became  the  sole  surviving  member 
of  the  firm;  and  after  he  had  made  some  payments  under 
the  deed  of  1846,  Lucena  and  the  other  assignees  of 
Parkes's  interest  brought  an  action  at  law  against  him  in 
the  name  of  Parkes,  to  recover  the  amount  remaining  due 
under  the  deed  of  1846;  whereupon  the  Plaintiff,  Smith, 
instituted  this  suit,  alleging  that  at  the  date  of  the  deed  of 
1846,  Parkes  was  indebted  to  Smith,  Brook  field  and  Wit- 
ham  in  sums  amounting  altogether  to  about  2,318/.  for 
money  lent,  and  for  a  mortgage  debt  and  business  trans- 
acted, and  he  insisted  on  his  right  to  5et  off  these  sums 
against  the  amount  due  on  the  covenant  contained  in  the 
deed  of  1846. 

Pending   the    suit   Parkes   obtained    judgment    in    the 
action.-^ 

The  Master  of  the  Rolls,  at  the  close  of  the  argu- 
ment, expressed  his  opinion  on  the  principal  points  in  the 
case,  and  stated,  that  he  was  of  opinion  that  the  plaintiiT 
(the  sole  surAnving  member  of  the  partnership  of  Smith. 
Witham  and  Brookfield)  was  entitled,  in  equity,  to  set  off 
against  the  debt  established  against  him  at  law  by  the  De- 
fendant Parkes,  such  sum  as  Parkes  owed  to  the  firm  of 
Smith,  Witham  and  Brookfield.  He  also  stated  his  opinion, 
that  the  other  Defendants  to  whom  Parkes  had  assigned 
his  interest  in  and  his  claim  against  the  finn,  under  the  deed 
of  dissolution,  were  also  bound  to  allow  such  set-off,  to 
the  extent  of  all  debts  due  to  the  firm  from  Parkes,  at  the 
time  the  assignment  was  made  to  them;  but  he  reserved  his 
opinion  on  the  question  whether  the  Plaintiff  was  entitled 
to  set  off  the  debts  incurred  by  Parkes  subsequently  10  that 
period.^ 


'The  Reporter's  Notes  of  the  arguments  of  counsel  are  omitted. 

*The  Master  of  the  Rolls  subsequently  held  that  the  plaintiff 
was  not  so  entitled,  he  having  notice  of  the  assignment. 

For  other  cases  involving  questions  of  set  off  in  partnership  and 
individual  demands,  see  43  Cent.  Dig.,  tit.  Set  Off,  Sees.  82-99;  Amer. 
Dig.,  tit.  Set  Off,  Key  numbers,  44  (2),  and  45. 


878  PROBLEMS  OF  SET  OFF— CORPORATIONS 


SECTION  2.— CORPORATION  CASES. 


SAWYER  V.  HOAG. 
In  the  Supreme  Court  of  the  United  States,  1873. 

84  United  States  Reports,  610. 

The  Liimbermairs  Insurance  Company  was  liable  to 
Sawyer  on  a  policy  of  insurance.  The  assignee  in  bank- 
ruptcy of  the  Company,  Hoag,  was  proceeding  against 
Sawyer  on  the  obligation  described  in  the  opinion  of  the 
Court.  This  was  a  bill  in  equity  brought  by  Sawyer  v. 
Hoag  to  enforce  a  right  of  set  off.  The  court  below  de- 
creed against  the  complainant.  ^ 

Mr.  Justice  Miller:  The  first  and  most  important 
question  to  be  decided  in  this  case  is  whether  the  indebted- 
ness of  the  appellant  to  the  insurance  company  is  to  be 
treated,  for  the  purposes  of  this  suit,  as  really  based  on  a 
loan  of  money  by  the  company  to  him,  or  as  representing 
his  unpaid  stock  subscription. 

The  charter  under  which  the  company  was  organized 
authorized  it  to  commence  business  upon  a  capital  stock  of 
$100,000,  with  ten  thousand  paid  in,  and  the  remainder  se- 
cured by  notes  with  mortgages  on  real  estate  or  otherwise. 
The  transaction  by  which  the  appellant  professes  to  have 
paid  up  his  stock  subscription  is,  shortly,  this :  He  gave  to 
the  company  his  check  for  the  full  amount  of  his  subscrip- 
tion, namely,  $5000.  He  took  the  check  of  the  company 
for  $4250,  being  the  amount  of  his  subscription  less  the 
15  per  cent,  required  of  each  stockholder  to  be  paid  in  cash, 
and  he  gave  his  note  for  the  amount  of  the  latter  check, 
with  good  collateral  security  for  its  payment,  with  interest 
at  7  per  cent,  per  annum.     The  appellant  and  the  company, 


'  The  rest  of  the  facts  are  stated  in  the  opinion  of  the  Court.  The 
facts  as  stated  by  the  Reporter,  and  his  notes  of  the  arguments  of 
counsel  are  omitted. 


SAWYER  V.  HOAG  879 

by  its  ofificers,  agreed  to  call  this  latter  transaction  a  loan, 
and  the  check  of  the  appellant  payment  in  full  of  his  stock; 
and  on  the  books  of  the  company,  and  in  all  other  respects 
as  between  themselves,  it  was  treated  as  payment  of  the  sub- 
scription and  a  loan  of  mone}'.  It  is  agreed  that  at  this 
time  the  current  rate  of  interest  in  Chicago  was  greater 
than  7  per  cent.,  and  it  is  not  stated  as  a  fact  whether  these 
checks  were  ever  presented  and  paid  at  any  bank,  or  that 
an}'  money  was  actually  paid  or  received  by  either  party  in 
the  transaction.  It  must,  therefore,  be  treated  as  an  agree- 
ment between  the  corporation,  by  its  officers,  on  the  one  part, 
and  the  appellant,  as  a  subscriber  to  the  stock  of  the  com- 
pany, on  the  other  part,  to  convert  the  debt  which  the  latter 
owed  to  the  company  for  his  stock  into  a  debt  for  the  loan 
of  money,  thereby  extinguishing  the  stock  debt.   *  *  *2 

The  result  of  it  [The  transaction  between  Sawyer  and 
the  company  by  which  the  company  was  said  to  re-loan  85 
per  cent,  of  the  stock  subscribed]  was  that  the  capital  stock 
of  the  company  was  neither  paid  up  in  actual  money,  nor 
did  it  exist  in  the  form  of  deferred  instalments  properly 
secured. 

It  is  said  by  the  appellant's  counsel  that  conceding  this, 
it  is  still  a  debt  due  by  him  to  the  corporation  at  the  time 
that  he  became  the  owner  of  the  debt  due  by  the  corpora- 
tion to  Hayes,  and,  therefore,  the  proper  subject  of  set-off 
under  the  twentieth  section  of  the  Bankrupt  Act.  That 
section  is  as  follows :  "In  all  cases  of  mutual  debts  or 
mutual  credits  between  the  parties,  the  account  between 
them  shall  be  stated,  and  one  debt  set  off  against  the  other, 
and  the  balance  only  shall  be  allowed  or  paid,  but  no  set-off 
shall  be  allowed  of  a  claim  in  its  nature  not  provable  against 
the  estate :  Provided,  that  no  set-off  shall  be  allowed  in  favor 
of  any  debtor  to  the  bankrupt  of  a  claim  purchased  by  or 
transferred  to  him  after  the  filing  of  the  petition."^ 

'The  Court's  discussion  of  the  transaction  between  the  company 
and  its  stockholders  is  omitted. 

*The   wording   of    Sec.   68a    of   the   Act   of    189S,    is   as    follows: 


880  PROP.LEMS  OF  SET  OFF— CORrORATIONS 

This  section  was  not  intended  to  enlarge  the  doctrine  of 
set-off,  or  to  enable  a  party  to  make  a  set-off  in  cases  where 
the  principles  of  legal  or  equitable  set-off  did  not  previously 
authorize  it. 

The  debts  must  be  mutual ;  must  be  in  the  same  right. 

The  case  before  us  is  not  of  that  character.  The  debt 
which  the  appellant  owed  for  his  stock  was  a  trust  fund 
devoted  to  the  payment  of  all  the  creditors  of  the  company. 
As  soon  as  the  company  became  insolvent,  and  this  fact  be- 
came known  to  the  appellant,  the  right  of  set-off  for  an 
ordinary  debt  to  its  full  amount  ceased.  It  became  a  fund 
belonging  equally  in  equity  to  all  the  creditors,  and  could 
not  be  appropriated  by  the  debtor  to  the  exclusive  payment 
of  his  own  claim. 

It  is  unnecessary  to  go  into  the  inquiry  whether  this 
claim  was  acquired  before  the  commission  of  an  act  of 
bankruptcy  by  the  company,  or  the  eft'ect  of  the  bankruptcy 
proceeding.  The  result  would  be  the  same  if  the  corpora- 
tion was  in  the  process  of  liquidation  in  the  hands  of  a 
trustee  or  under  other  legal  proceedings.  It  would  still 
remain  true  that  the  unpaid  stock  was  a  trust  fund  for  all 
the  creditors,  which  could  not  be  applied  exclusively  to  the 
payment  of  one  claim,  though  held  by  the  stockholder  who 
owed  that  amount  on  his  subscription. 

Nor  do  we  thinlv  the  relation  of  the  appellant  in  this 
case  to  the  corporation  is  without  weight  in  the  solution  of 
the  question  before  us.  It  is  very  true,  that  by  the  power 
of  the  legislature  there  is  created  in  all  acts  of  incorpora- 
tion a  legal  entity  which  can  contract  with  its  shareholders 
in  the  ordinary  transactions  of  business  as  with  other  per- 
sons. It  can  buy  of  them,  sell  to  them,  make  loans  to 
them,  and  in  insurance  companies,  make  contracts  of  insur- 
ance with  them,  in  all  of  which  both  parties  are  bound  by 


"In  all  cases  of  mutual  tlebts  or  mutual  credits  between  the  estate  of 
a  bankrupt  and  a  creditor  the  account  shall  be  stated  and  one  debt  shall 
be  set  off  against  the  other,  and  the  balance  only  shall  be  allowed  or 
paid." 


I 

I 


SAWYER  r.  HOAG  881 

the  ordinary  laws  of  contract.  The  stockholder  is  also  re- 
lieved from  personal  liability  for  the  debts  of  the  company. 
But  after  all,  this  artificial  body  is  but  the  representative 
of  its  stockholders,  and  exists  mainly  for  their  benefit,  and 
is  governed  and  controlled  by  them  through  the  officers 
whom  they  elect.  And  the  interest  and  power  of  legal  con- 
trol of  each  shareholder  is  in  exact  proportion  to  the  arnount 
of  his  stock.  It  is,  therefore,  but  just  that  when  the  inter- 
est of  the  public,  or  of  strangers  dealing  with  this  corpora- 
tion is  to  be  affected  by  any  transaction  between  the  stock- 
holders who  own  the  corporation  and  the  corporation  itself, 
such  transaction  should  be  subject  to  a  rigid  scrutiny,  and 
if  found  to  be  infected  with  anything  unfair  towards  such 
third  person,  calculated  to  injure  him,  or  designed  inten- 
tionally and  inequitably  to  screen  the  stockholder  from 
loss  at  the  expense  of  the  general  creditor,  it  should  be  dis- 
regarded or  annulled  so  far  as  it  may  inequitably  affect  him. 
These  principles  recjuire  the  affirmation  of  the  decree 
in  the  present  case,  and  it  is  accordingly  affirmed.^ 


For  other  cases  in  accord:  See  Thompson  on  Corporations,  edition 
of  1910,  Sec.  5854,  notes. 

Compare:  Lawrence  v.  Nelson,  21  N.  Y.  158,  i860.  (The  A  Co. 
was  a  mutual  insurance  company,  having  no  dealings  with  regard  to 
insurance  with  any  but  its  own  members.  B  was  a  member  of  the 
company.  On  its  insolvency  B  attempted  to  set  ofif  a  loss  sustained 
by  him,  adjusted  and  payable  by  the  company  against  his  indebtedness 
for  premiums  due  upon  policies.  Held,  that  B  could  not  do  this,  as 
the  premiums  constittited  a  fund  from  which  losses  were  paid,  which 
he  as  a  member  was  bound  to  make  good.) 

Welles  V.  Stout,  38  Fed.  807,  i88g.  (The  A  bank  was  required  by  the 
Controller  to  make  good  the  value  of  certain  securities,  which  had  be- 
come worthless.  B,  a  stockholder  contributed  to  a  fund  held  by  the 
Bank  in  trust  to  carry  out  the  directions  of  the  Controller.  Part  of 
this  fund  had  been  expended  by  the  Bank  before  a  receiver  was  appointed. 
The  Receiver  treated  the  balance  as  part  of  the  ordinary  assets  of  the 
Bank,  and  sued  B  for  an  assessment  on  his  shares.  Held,  that  B  could 
set  oflf  his  interest  in  the  balance  of  the  fund.) 


882  PROBLEMS  OF  SET  OFF— CORPORATIONS 


MATHEZ  V.  NEIDIG. 
In  the  Court  of  Appeals  of  New  York,  1878. 

72  New  York  Reports,  100' 

Church,  Ch.  J.  The  plaintiff,  as  a  creditor  of  "The 
New  York  Improved  Barrel  Company,"  sought  to  recover 
against  the  defendant,  as  a  stockholder  of  the  company, 
under  the  provisions  of  section  10  of  the  General  Manu- 
facturing Law  (chap.  40,  Laws  of  1848),  which  reads  as 
follows :  "All  the  stockholders  of  every  company  incorpo- 
rated under  this  act  shall  be  severally  individually  liable  to 
the  creditors  of  the  company  in  which  they  are  stockhold- 
ers to  an  amount  equal  to  the  amount  of  stock  held  by 
them,  respectively,  for  all  debts  and  contracts  made  by . 
such   company,    until   the   whole   amount   of   capital    stock 

fixed  and  limited  by  such  company  shall  have  been  paid 
jj^  "     *     *     * 

It  was  established  and  not  disputed  that  the  amount 
of  the  capital  stock  had  not  all  been  paid  in;  and  although 
there  was  some  dispute  whether  the  defendant  owned 
$2,000,  $3,000  or  $5,000  of  the  stock,  that  question  was 
submitted  to  the  jury,  and  is  of  no  importance  upon  this 
appeal. 

The  defendant  v/as  president  of  the  company  for  about 
three  months,  during  which  time  he  advanced  $1,500.  and 
purchased  three  notes  against  the  company  amounting  to 
$3,000,  which  he  surrendered  to  the  company,  and  he  also 
advanced  about  $2,500  from  his  own  means,  with  which 
he  paid  the  workmen. 

The  court  held,  in  substance,  that  if  the  amount  of 
stock  owned  by  the  defendant  did  not  exceed  these  advances, 
the  plaintiff  could  not  recover.  The  learned  counsel  for 
the    appellant   presented,    and   elaborately   argued,    several 


The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted 


MATHEZ  V.  NEIDIG  883 

propositions  which,  if  correct,  would  require  a  reversal  of 
the  judgment.  His  principal  contention  is,  "that  only  those 
payments  which  by  law  could  be  enforced  against  a  stock- 
holder, ma}'-  be  voluntarily  paid  by  him,  and  offset  against 
a  creditor."  This  proposition  implies,  I  think,  some  mis- 
apprehension as  to  the  nature  and  character  of  the  de- 
fense interposed  in  this  action,  and  the  nature  and  extent 
of  the  remedy  of  creditors  under  the  statute  cited.  A  stock- 
holder may  be  absolutely  discharged  from  all  liability  under 
this  statute,  by  payment,  on  legal  compulsion,  to  any  cred- 
itor or  creditors  for  whose  debts  he  is  liable,  if  such  pay- 
ment equals  the  amount  of  his  stock.  His  liability  is 
measured  by  the  amount  of  stock  held  by  him.  To  entitle 
a  stockholder  to  interpose  such  discharge  as  an  absolute  bar 
to  a  claim  by  other  creditors,  either  at  law  or  in  equity,  it 
would,  I  think,  be  incumbent  upon  him  to  show  that  the 
payment  was  made  to  a  creditor  or  creditors  for  whose  debts 
he  was  liable  under  the  statute.  He  is  only  liable  to  pay 
the  amount  once ;  but  the  payment  must  be  made  in  dis- 
charge of  a  statute  liability.  Probably  the  same  effect  would 
result  from  a  voluntar}-  payment.  The  defense  in  this  case 
rests  upon  a  very  different  principle.  The  defendant  was 
a  creditor  of  the  company  for  money  advanced,  and  it  mat- 
ters not  whether  the  money  was  used  to  discharge  obliga- 
tions for  which  the  defendant  was  individually  liable,  under 
the  statute,  or  not.  The  company  was  bound  to  pay  all  its 
debts,  and  could  borrow  money  for  that  purpose.  The 
money  was  used  for  the  benefit  of  the  company,  and  it  be- 
came liable  to  the  defendant,  and  he  became  its  creditor  for 
the  amount.  I  agree  with  the  counsel  for  the  appellant, 
that  the  statute  liability  constitutes  a  fund  which  belongs 
to  the  creditors  to  secure  the  payment  of  their  debts,  but 
it  belongs  to  all  the  creditors,  as  well  as  those  who  are  stock- 
holders as  those  who  are  not.  The  defendant,  as  a  cred- 
itor, had  an  interest  in  the  fund  as  well  as  the  plaintiff,  and 
his  debt  was  one  which  would  be  chargeable  against  the 


884    PROBLEMS  OF  SET  OFF— CORPORATIONS 

fund,  because  it  was  a  debt  against  the  company,  for  the 
payment  of  which  stockholders  were  individually  liable,  and 
this  would  be  so  irrespective  of  the  question  whether  the 
money  advanced  by  the  defendant  was  used  to  pay  obliga- 
tions for  which  he  was  individually  liable  or  not.  An  action 
at  law  cannot  be  maintained  against  a  stockholder,  who  is 
also  a  creditor  to  an  amount  equal  to  his  stock,  for  the 
reason  that  he  has  an  interest  in  the  fund  sued  for,  and  it 
cannot  be  known  but  that  the  whole  fund  is  sufficient  to 
pay  all  the  debts.  No  accounting  can  be  had,  because  the 
proper  parties  are  not  before  the  court.  If  the  liability  of 
other  stockholders  was  sufficient  to  pay  all  the  debts,  his  own 
liability  would  be  balanced  by  his  debt  against  the  company. 
A  stockholder  owning  $i,ooo  of  stock  with  a  debt  against 
the  company  of  $5,000,  sued  by  a  creditor  for  $1,000,  would 
himself  be  entitled  to  five-sixths  of  the  $1,000,  if  there 
were  no  other  stockholders  personally  liable  and  no  other 
debts;  and  if  there  were  other  personal  liabilities  to  the 
amount  of  $5,000,  and  no  other  debts,  he  would  be  entitled 
to  $5,000  of  the  $6,000  constituting  the  fund.  Hence  it 
would  be  inequitable  to  permit  a  recovery  against  a  stock- 
holder thus  situated.  The  creditor  has  his  election  to  bring 
such  an  action  against  a  stockholder,  or  to  bring  an  action 
in  equit3^  and  have  an  accounting  between  all  the  stock- 
holders and  all  the  creditors,  when  the  rights  of  each  can 
be  ascertained  and  protected.  {Bk.  of  Poughkeepsie  v.  Ib- 
hotson,  24  Wend.,  73;  Briggs  v.  Pennington,  8  Cow.,  392.) 
The  defense  interposed  in  this  and  analogous  cases  may 
not  constitute  an  absolute  bar  to  all  claim  like  a  recovery, 
and  payment  by  another  creditor  for  the  whole  amount  of 
personal  liability  of  a  stockholder,  nor  is  it  strictly  an  ofifset 
at  law,  but  it  is  a  defense  to  this  form  of  action,  in  the 
nature  of  an  equitable  offset,  based  upon  the  equitable  rights 
of  the  defendant  to  the  fund  sought  to  be  taken  from  his 
possession,  without  the  necessar}^  facts  appearing  to  enable 
the  court  to  determine  the  extent  of  those  rights. 


MATHEZ  V.  NEIDIG  885 

This  question  is  not  a  new  one  in  this  court.  In  Garri- 
son V.  Howe  (17  N.  Y.,  458),  where  substantially  the  same 
question  was  involved,  Denio,  J.,  said :  "Suppose  a  stock- 
holder to  be  a  creditor  to  just  the  amount  of  his  stock ;  he 
ought  not  to  be  required  to  pay  anything,  unless  the  sum 
of  the  corporate  debts  is  larger  than  the  aggregate  of  all 
the  liabilities  of  the  stockholders.  But  he  cannot,  in  this 
class  of  actions,  have  an  account,  because  the  proper  par- 
ties are  not  before  the  court.  He  must,  therefore,  upon  the 
doctrine  of  the  plaintiff  in  this  suit,  pay  the  debt  sued  for, 
though  in  equity  he  is  not  liable  for  anything;"  and  he 
stated  the  rule  to  be:  "If  the  creditor  cannot  find  a  re- 
sponsible stockholder,  who  is  not  at  the  same  time  a  creditor 
to  the  amount  of  his  stock,  he  must  proceed  for  an  account, 
if  he  ascertains  that  such  a  proceeding  will  result  in  recover- 
ing his  debt." 

A  defendant  in  such  an  action  may  also,  doubtless, 
bring  an  action  for  an  accounting,  or  he  may  be  content  with 
interposing  a  defense,  in  whole  or  in  part,  to  the  plaintiff's 
action  at  law. 

In  the  matter  of  Empire  City  Bank  (18  N.  Y.,  227), 
the  doctrine  is  reiterated.  The  court  say :  "In  such  a  case 
no  account  could  be  taken,  and  it  would  not  regularlv  ap- 
pear but  that  the  plaintiff's  debt  was  the  only  one  in  exist- 
ence against  the  corporation ;  nor  could  it  be  shown  but 
that  there  were  other  stockholders  who  were  not  creditors, 
whose  liabilities  were  sufficient  to  satisfy  the  plaintiff's  debt. 
In  such  a  case  the  plaintiff  ought  to  be  exonerated  to  the 
extent  of  his  own  debt."  I  am  not  aware  of  any  authority 
in  conflict  with  these  decisions,  and  we  have  been  referred 
to  none. 

The  rule  commends  itself  to  my  judgment.  Stock- 
holders have  the  same  right  to  deal  with  the  corporation 
that  other  persons  have,  and,  as  creditors,  they  are  entitled 
to  the  same  measure  of  protection.  It  may  be,  as  argued, 
that  the  rule  might  enable  officers  of  corporations  to  make 


886  PROBLEMS  OF  SET  OFF— CORPORATIONS 

preferential  payments  to  favored  creditors,  and  thus  work 
injustice  to  others;  but,  if  any  restrictions  or  Hmitations  in 
this  respect  are  necessary,  the  remedy  is  with  the  Legis- 
lature. Nothing  appears  in  this  case  to  warrant  an  infer- 
ence of  bad  faith  on  the  part  of  the  defendant.  The  facts 
disclosed  justify  the  inference  that  the  money  was  advanced 
to  the  company  to  relieve  it  from  pressing  liability,  and 
enable  it  to  prosecute  its  business.  I  see  no  reason  why  the 
defendant,  as  a  creditor,  does  not  occupy  as  favorable  a 
position  as  the  plaintiff,  and  there  is  no  justice  in  permitting 
the  latter  to  recover  money  to  which  the  former  has  an  equal 
claim,  in  an  action  where  it  cannot  regularly  be  ascertained, 
but  that  other  portions  of  the  aggregate  fund,  which  are 
accessible  to  the  plaintiff,  are  sufficient  to  satisfy  his  de- 
mand.- 

Judgment  affirmed.^ 


^  The  Court's  discussion  of  another  section  of  the  Act  is  omitted. 

^  For  other  cases  allowing  the  set  off  when  the  proceeding  iv  to 
enforce  a  statutory  liability  of  the  stockholders.  See  Thompson  on 
Corporations,  edition  of   igio,  Sec.  5855,  notes. 

Query:  Does  the  "hopeless  conflict  in  the  decisions  on  the  ques- 
tion of  the  right  of  a  stockholder  to  set  off"  referred  to  ibid.,  Sec.  5854. 
5855  really  exist? 


GALLAGHER  v.  GERMANIA   BREWING  CO.  887 


GALLAGHER  v.  GERMANIA  BREWING  CO. 
In  the  Supreme  Court  of  Minnesota,   1893. 

Z2  Minnesota,  214.' 

Mitchell,  J.  The  plaintiff,  as  assignee  of  one  West- 
phal  under  a  general  assignment  for  the  benefit  of  creditors, 
brought  this  action  to  recover  for  goods  sold  and  delivered 
by  his  assignor  to  the  defendant  corporation.  Jacob  Barge 
and  John  Vander  Horck  inten^ened,  and  set  up  in  their  com- 
plaint that  they  owned,  and  for  nearly  two  years  had  owned, 
(each  one-half,)  all  the  capital  stock  of  the  defendant,  no 
other  person  but  themselves  having  any  interest  in  the  stock 
or  property  of  the  corporation;  that  each  of  them  had  a 
valid  and  unsatisfied  judgment  against  Westphal  upon  a 
cause  of  action  which  accrued  before  the  assignment  to 
plaintiff;  that  Westphal  was,  and  for  over  two  years  had 
beeny  utterly  insolvent ;  and  that  his  estate,  of  which  plaintiff  is 
the  assignee,  was  so  hopelessly  insolvent  that  it  was  insuffi- 
cient to  pay  even  the  expenses  of  administering  the  assign- 
ment. The  relief  sought  was  that  their  claims  against  West- 
phal might  be  allowed,  in  equal  amounts,  as  equitable  set-offs 
to  the  claim  of  the  plaintiff  against  the  defendant  corporation. 
From  an  order  overruling  a  demurrer  to  the  complaint,  the 
plaintiff  appeals,  his  contention  being — First,  that  Barge 
and  Vander  Horck  had  no  such  interest  in  the  litigation  as 
to  entitle  them  to  intervene ;  second,  that  their  claims  cannot 
be  set  off  against  a  claim  against  the  corporation,  because  a 
corporation  is  a  legal  entity,  entirely  distinct  from  its  stock- 
holders. These  two  propositions  amount  really  to  the  same 
thing,  for,  if  Barge  and  Vander  Horck  cannot  set  off  their 
claims  against  that  of  plaintiff  against  the  corporation,  thev 
have  no  such  interest  in  the  subject  of  litigation  as  would 

*  The  Reporter's  statement  of  the  facts  of  the  case,  and  his  notes 
of  the  arguments  of  counsel  are  omitted. 


888  PROBLEMS  OF  SET  OFF— CORPORATIONS 

entitle  them  to  intervene;  on  the  other  hand,  if  their  claims 
are  proper  equitable  set-offs,  their  right  to  intervene  for 
the  purpose  of  setting  them  up  is  very  clear.  This  case  is 
certainly  a  novel  one,  for  we  doubt  whether  an  instance  can 
be  found  in  the  books  where  stockholders  ever  attempted  to 
set  up  their  several  equities  by  way  of  set-off  to  claims 
against  the  corporation.  Of  course,  the  want  of  a  precedent 
is  by  no  means  controlling  with  courts,  especially  in  ad- 
ministering equitable  relief;  but  it  would  seem  that,  if  the 
relief  here  asked  was  consistent  with  legal  or  equitable  prin- 
ciples, some  case  would  be  found  where  it  had  been  granted. 

The  facts  of  the  present  case  appeal  to  a  natural  sense 
of  justice,  for  while,  by  fiction  of  law,  a  corporation  is  a 
distinct  entity,  yet  in  reality  it  is  an  association  of  persons 
who  are  in  fact  the  beneficial  owners  of  all  the  corporate 
property.  Hence,  if  interveners  cannot  set  off  their  claims, 
the  practical  result  is  that  Westphal's  estate  will  collect  its 
entire  claim  out  of  what  is  really  their  property,  while  the 
estate  is  at  the  same  time  indebted  to  them  on  claims  of 
greater  amount,  which  they  will  wholly  lose  because  of 
Westphal's  insolvency ;  but,  as  has  been  often  said,  hard 
cases  are  liable  to  make  bad  law. 

The  right  of  equitable  set-oft'  is,  of  course,  not  derived 
from,  or  dependent  upon,  statute,  but  rests  upon  a  distinctiv 
equitable  doctrine,  which  courts  of  equity  have  applied  on 
certain  well-recognized  equitable  grounds,  the  object  being 
to  effect  a  clear  equity  and  prevent  irremediable  injustice: 
and  it  may  be  stated  as  a  general  rule  that,  whenever  neces- 
sary to  accomplish  that  end,  the  courts  will  permit  an  equit- 
able set-off,  although  the  debts  accrued  in  different  rights ; 
as,  for  example,  by  allowing  a  separate  debt  to  be  set  off 
against  a  joint  debt,  or,  conversely,  a  joint  debt  against  a 
separate  debt.  They  will  also  disregard  the  nominal  parties 
to  the  record,  and  consider  the  real  parties  in  interest;  as, 
for  example,  when  the  assignor  of  a  chose  in  action  sues 
for  the  benefit  of  the  assignee,  or  a  trustee  for  the  benefii- 


GALLAGHER  v.  GERMANIA  BREWING   CO.  889 

of  the  cestui  que  trust.     Hence,  had  the  plaintiff's  claim 
been  a  joint  one  against  the  interveners,  there  would  have 
been  no  doubt  of  their  right  to  set  off  their  separate  claims 
against  it,   for  insolvency  is  well  recognized  as  a  distinct 
equitable  ground  for  allowing  such  a  set-off.     But  such  a 
case  is  not  analogous  to  the  present.     To  allow  the  set-off 
here,  it  is  necessary  to  wholly  ignore  the  legal  doctrine,  or 
fiction,  whichever  you  may  call  it,  that  a  corporation  is  an 
entity  separate  and  distinct  from  the  body  of  its  stockhold- 
ers, and  to  treat  it  as  a  mere  association  of  individuals  who 
are  the  real  parties  in  interest.     In  dealing  with  the  rights 
of  creditors,  and  the  obligations  existing  between  a  corpora- 
tion  and  its  shareholders  by   reason  of  their  contract  of 
membership,  undoubtedly  the  courts  often  find  it  necessary 
to  consider  the  real  parties  in  interest  as  the  individual  share- 
holders; but  it  may  be  laid  down  as  a  rule  that,  except  in 
such  cases,  it  has  been  found  absolutely  essential,   for  the 
administration  of  justice,  to  treat  a  corporation  as  a  collec- 
tive entity,  without  regard  to  its  individual   shareholders. 
In  no  other  way  can  the  title  to  corporate  property  be  kept 
free  from  complication  and  uncertainty.     The  transferable 
nature  of  stock  in  a  corporation  is  also  a  good  reason  why 
the  theory  of  a  corporate  entity  should  be  preserved,  and 
why  it  is  necessaiy  to  discriminate  sharply  between  corpo- 
rate rights  and  obligations  and  those  of  shareholders  per- 
sonally.    If  the  rights  or  liabilities  of  a  corporation  could 
be  affected  by  the  acts  of  the  stockholders,  except  when 
acting  in  the  corporate  name,  or  if  shareholders  could  set  up 
their  several  equities  against  persons  having  claims  against 
the  corporation,  or,  conversely,  if  claims  in  favor  of  the 
corporation  could  be  set  off  against  claims  against  individual 
stockholders,  it  can  easily  be  seen  into  what  confusion  and 
chaos  corporate  affairs  would  inevitably  fall. 

Inasmuch  as  the  two  interveners  own  all  the  stock  of 
this  corporation,  the  facts  of  this  case  seem  comparatively 
free  from  embarrassments,  and  the  contention  of  respond- 


890  PROBLEMS  OF  SET  OFF— CORPORATIONS 

ent  quite  plausible.  But,  suppose  there  were  fifty  other 
stockholders,  (which  would  not  alter  the  principle,)  what 
would  be  the  result?  Could  interveners  then  interpose  their 
claims  at  set-offs,  and,  if  so,  could  they  do  so  to  the  full 
amount  of  their  claims,  or  only  in  the  proportion  which 
their  shares  bore  to  the  whole  capital  stock?  And,  if  the 
former,  would  they  have  a  claim  for  the  excess  against  the 
corporation,  or  a  right  to  call  on  the  other  stockholders  for 
contribution  ? 

Again,  the  right  of  set-off,  if  any  exists,  must  be  mu- 
tual. Hence,  if  stockholders  can  interpose  their  individual 
demands  as  set-offs  to  a  demand  against  the  corporation, 
it  follows  that  a  defendant  can  set  up  demands  against  the 
individual  stockholders  at  set-offs  to  demands  in  favor  of 
the  corporation. 

Illustrations  might  be  multiplied  indefinitely  to  show 
that  to  recognize  any  such  right  would  result  in  the  worst 
sort  of  complications,  and  that  the  only  safe  or  sound  rule 
is  to  adhere  strictly,  in  such  cases,  to  the  doctrine  of  a  cor- 
porate entity  distinct  from  the  individual  stockholders. 

What  means,  if  any,  the  interveners  might  have  had, 
or  may  hereafter  have,  of  protecting  themselves,  it  is  not 
now  our  business  to  inquire,  but  we  are  clear  that  their 
claims  against  plaintiff's  assignor  are  not  the  subjects  of 
equitable  set-off  to  a  claim  against  the  defendant  corpora- 
tion. 

Order  reversed.^ 


Compare:  New  York  Ice  Co.  v.  Parker,  21  How.,  Pr.,  302,  1861. 
(The  A  Co.  brought  a  suit  against  B.  Held,  that  B  could  not  set  off 
a  claim  which  he,  B,  had  against  some  [or  all?]  of  the  stockholders 
of  the  A  Co.  jointly.) 


CHAPTER   XV. 


LIABILITY  OF  ORIGINAL  SHAREHOLDERS 
IN  PRIVATE  CORPORATIONS. 


SECTION   1.— LIABILITY   IN   GENERAL. 


THE  CASE  OF  THE  TWO  LOMBARDS.^ 
In  The  Court  of  Common  Pleas,    1441-2. 

Year  Book   19  Henry  VI,  Folio  80,  Placitum. 

Markham  came  to  the  bar  and  showed  how  one  brought 
a  writ  against  the  Lombards,  of  London,  scilicit.  Praecipe 
Socictati  Luuibardoritui  Loud.  Mercatorum  d'Florencia, 
And  two  Lombards  came — and  he  named  their  names,  who 
were  at  the  bar  in  their  own  persons,  being  distrained  by  the 
sheriff  of  London,  and  the  issues-  returnable  here  at  ten 
pounds.  And  Sir,  you  have  here  these  same,  etc.,  who  ap- 
peared in  their  own  persons  as  Lombards  to  record  their 
presence.  Newton  [Chief  Justice]  demanded  the  plaintiff, 
and  he  appeared,  and  afterwards  lie  demanded  the  defend- 
ant, and  the  crier  demanded  them  in  this  form :  The  fellow- 
ship of  Lombards,  according  to  the  writ.  And  the  two  Lom- 
bards appeared  as  before.  Newton :  that  is  no  appearance, 
for  the  writ  which  we  ha\e  returned  here  is,  the  fellowship  of 
Lombards,  and  you  say  that  you  are  not  of  the  fellowship, 
and  if  so,  then  the  sheriff  has  done  wrong  to  you  when 
he  distrained  }()u  by  liis  writ ;  in  which  case  }-our  remedy 
lies  against  him,  and  not  in  this  place  in  this  way.  Brown : 
If   a   writ   be   brought   against   me   by   the   name   of   John 


'  Translated  by  M.  C.  K. 

^Issues:    Profits  growing  from  amerciaments  or  fines.     See  Terms 
of  the  Law,  p.  416. 

(891) 


892  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

Brown,  and  the  sheriff  distrains  me,  whereas  my  name  is 
Thomas,  when  the  issues  are  returned  here,  I  may  weU  say 
that  my  name  is  Thomas,  and  that  I  was  distrained  by  the 
name  of  John,  and  pray  that  the  Court  record  my  appear- 
ance and  save  my  issues.  And  this  was  denied  to  him  by  the 
Court,  but  that  his  issues  are  lost  and  that  he  shall  have 
his  recovery  against  the  sheriff.  Brown :  Suppose  that  a 
praecipe  quod  reddat  was  brought  against  J.  B.,  who  is 
summoned  in  my  land,  and  the  summons  returned ;  I  may 
well  say  that  I  am  named  Thomas  Brown,  and  although  I 
was  summoned  by  the  name  of  John  Brown  in  my  land,  by 
default,  there  is  no  default  in  me :  so  I  shall  plead  as  be- 
fore to  save  my  issues,  otherwise  I  shall  lose  them,  and  no 
default  is  in  me.  And  the  justices  paid  attention  to  some- 
thing else  which  was  at  the  bar,  and  gave  him  no  reply. 
Markham :  it  appears  to  you  that  the  writ  cannot  be  good 
in  this  form — Societati;  wherefore  we  pray  your  rule. 
Paston,  [Judge],  if  a  writ  be — Praecipe  Majori  and  Societati 
Civitaties  Loud.  If  all  the  commonalty  appear,  and  the 
Mayor  does  not,  they  cannot  plead  in  abatement  of  the  writ 
that  there  is  no  such  corporation;  Ergo  nee  hie.  Markham, 
Sir,  then  we  will  consider  until  to-morrow.^ 


'  Sir  Robert  Brooke,  in  "La  Graunde  Abridgement  Tille  Trespass," 
pi.  135,  has  the  following  note  of  this  case  :  "Debt.  At  the  distress  the 
sheriif  distrained  J.  B.  where  the  name  of  the  defendant  in  the  writ 
was  T.  B.  There  J.  B.  shall  have  his  remedy  against  the  sheriff,  and 
hoc  videtitr  by  a  general  action  of  trespass,  but  where  he  serves  the 
writ  rightly,  and  it  is  imperfect,  or  he  makes  a  false  return,  videtur 
that  action  upon  the  case  lies,  also  on  the  other  hand  of  an  actual  tort, 
as  above.  And  the  principal  case  was  that  debt  was  brought  against, 
socictatem  Lumbardorum  iiicrcatoruiii  de  Floranc,  and  the  sheriff  dis- 
trained two  Lumbards,  who  came  in  person  and  prayed  their  appearance 
should  be  recorded  to  save  their  issues  as  distinct  persons  sed  non  de 
sociatateate,  Lumbardorum,  and  idee  non  allocatur,  but  that  they  should 
be  put  to  their  remedy  against  the  sheriff  of  London,  ut  supra,  for 
where  a  corporation  is  impleaded  they  should  not  distrain  any  private 
person.  Quod  nota."  Brooke's  Abridgement  Trespass,  p.  290.  pi.  135. 
Query:  May  we  conclude  from  the  case  that  had  the  two  Lombards 
been  of  the  fellowship  the  Judges  would  have  still  considered  that  the 
sheriff  would  not  have  been  justified  in  distraining  on  them? 

Viner  apparently  had  his  information  of  the  case  from  Brooke. 
See  Viner's  Abridgement,  Vol.  6,  p.  310.  "Debt  was  brought  against 
the  Society  of  Lumbard  Merchants  of  Florence,  and  the  sheriff  dis- 
trained 2  Lumbards,  zvho  came  in  person,  and  prayed  their  appearance  to 
be  recorded  to  save  their  issues  as  distinct  persons,  but  not  as  of  the 


THE  CASE  OF  THE  TWO  LOMBARDS  893 

Society  of  Lumbards  &  idea  non  allocatur,  but  that  they  shall  be  put  to 
their  remedy  against  the  Sheriff  of  London,  by  a  general  action  of 
trespass;  for  where  a  corporation  is  impleaded,  they  ought  not  to 
distrain  any  private  person;  quod  nofa.  Br.  Trespass,  pi.  n=5  cites  lo 
H.  6  80." 

Professor  Williston  in  his  article  on  "The  History  of  the  Law  of 
Business  Corporations  before  1800,"  Select  Essays  on  Anglo-American 
Legal  History,  Vol.  3,  p,  229,  follows  Viner,  going  indeed  so  far  as  to 
say  that  it  "seems  to  have  been  well  understood,"  that  the  debt  of  a 
corporation  was  not  a  debt  of  the  individual  members.  "For  instance, 
in  Y.  B.,  19  Hy._  VI  80,  it  was  held  that  an  action  of  debt  being  brought 
against  the  Society  of  Lombards,  and  the  sheriff  having  distrained  two 
individual  Lombadrs,  trespass  would  lie  against  hm.  For  where  a 
corporation  is  impleaded  they  ought  not  to  distrain  any  private  person.'  " 


894 


LIABILITY  OF  ORIGINAL   SHAREHOLDERS 


EDMUNDS  V.  BROWN. 
In  the  Court  of  King's  Bench,  1669. 

I  Levinz's  Reports,  237. 

Debt  of  an  obligation  of  500/.  The  Defendant  pleads 
Non  est  factum,  and  on  the  Evidence  it  appears.  That  the 
Defendants  were  two  of  the  Principal  of  the  Company  of 
Woodmongers  lately  dissolved ;  and  that  the  Money  was 
borrowed  in  the  Name  of  the  Company,  and  the  Obligation 
sealed  in  the  Company's  Name,  and  with  their  Seal ;  and  the 
Defendants,  as  was  usual,  set  their  Names  to  the  Obligation, 
but  the  Obligation  was,  Noverint  universi  per  praesentes  nos 
Magistruin  &  Guardianos,  &c.  del  Company  de  Wood- 
mongers  teneri,  &c.  And  the  Obligation  was  endorsed  with 
sigillat'  &  dclibcrat'  in  pracscntia,  &c.  and  attested.  And 
now  the  Company  being  dissolved,  the  Plaintifif  brought 
the  Action  against  the  Defendants,  intending  to  charge 
them  in  their  own  Right.  But  it  was  ruled  by  the  Chief 
justice  at  Nisi  prius  at  Guild-hall,  that  he  could  not  so  do, 
it  being  tit  supra ;  whereupon  the  Plaintiff  was  nonsuit. 


SALMON  V.  THE  HAIVIBOROUGH  COMPANY  895 


SALMON  z'.  THE  HAMBOROUGH  COMPANY. 

In    the    House    of    Lords    and    the    High    Court    of 
Chancery,  1672. 

Cases  ill  Chancery,  204. 

Doctor  Salmon  against  the  Hamborough  Company, 
by  the  name  of  the  Governor,  Assistants  and  Fellowship 
of  Merchant  Adventurers  of  England,  and  divers  particular 
members  of  that  Company  by  name,  in  their  natural  capa- 
tities. 

The  bill  charged,  that  the  company  were  incorporated 
prout  per  letters  patent,  and  had  power  to  make  by-laws 
and  to  assess  rates  upon  cloaths  (which  was  the  commodity 
they  dealt  in)  and  by  poll  upon  every  member  to  defray 
the  necessary  charge  of  the  company,  and  that  the  com- 
pany had  imposed  rates  accordingly,  as  namely,  4s.  6d.  upon 
every  white  cloath  exported,  and  divers  others,  and  thereby 
raised  8000/.  per  Annum  towards  the  support  of  the  common 
charge  of  the  company,  and  that  they  had  thereby  got 
great  credit,  and  borrowed  great  sums  of  money  by  their 
common  seal,  and  particularly  the  plaintiff  lent  2000/. 
upon  that  security  many  years  since.  And  the  bill  did  set 
forth  divers  advantages  they  had  in  trade  by  being  mem- 
bers of  this  corporation,  which  others  wanted.  And  the 
bill  did  charge,  that  the  company  having  no  common  stock, 
the  plaintiff  had  no  remedy  at  law  for  his  debt,  but  did 
charge  that  their  usage  had  been  to  make  taxes,  and  levy 
actions  upon  the  members  and  their  goods,  to  bear  the  charge 
of  their  company  to  pay  their  debts,  and  did  complain  that 
they  now  did  refuse  to  execute  that  power,  and  did  particu- 
larly complain  against  divers  of  the  members  by  name,  that 
they  did  refuse  to  meet  and  lay  taxes,  and  that  they  did 
pretend  want  of  power  by  their  charter  to  lay  such  taxes, 
whereas  they  had  formerly  exercised  power,  and  thereby 
gained   credit;   whereupon    the   plaintiff   lent   them    2000/. 


896  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

which  was  for  the  use  and  support  of  the  company's  charge, 
and  so  ought  to  be  made  good  by  them,  and  so  prayed  to  be 
relieved. 

Paschae,  1656,  this  bill  was  filed,  and  the  company 
served  with  process,  but  would  not  appear,  they  having 
nothing  by  which  they  may  be  distrained :  But  divers  par- 
ticular members  being  served  in  their  natural  capacities,  did 
appear  and  demur,  for  that  they  were  not  in  that  capacity 
liable  t©  the  plaintiff's  demands.  10,  May,  1666.  On  the 
argument  the  demurrer  was  allowed,  and  the  bill  dismist 
as  to  them,  and  that  dismission  enrolled,  and  thereupon  a 
petition  of  appeal  was  preferred  to  the  Lords  in  Parliament, 
admitting  that  in  the  ordinary  course  of  proceedings  in 
Chancery  that  Court  could  not  help  the  plaintiff.  But  in 
causes  of  this  nature  the  Lords  house  had  given  special 
directions  to  the  Chancei"y  to  relieve,  and  it  had  been  ac- 
cordingly so  done,  and  produced  two  precedents  against 
companies  in  London  for  that  purpose.  And  to  this  petition 
the  defendants  particularly  named  did  put  in  an  answer. 
Plea  and  demurrer,  and  the  company,  tho'  several  times 
summoned,  did  not  appear.  And  upon  debate  of  the  mat- 
ters before  the  Lords  at  the  Bar  of  the  Lords  house,  20 
January,  1670,  this  order  was  made. 

The  matter  upon  the  petition  of  Salmon,  Dr.  of 
Physick,  exhibited  to  the  Lords  spiritual  and  temporal  in 
Parliament  assembled,  against  the  Governors,  assistants  and 
fellowship  of  the  merchant  adventurers  of  England,  com- 
monly called  the  Hamburg  Company,  and  Sir  Charles  Lloyd, 
Baronet,  Sir  Anthony  Bateman  Knight,  Thomas  Smith, 
Richard  Wyon,  John  Dogget,  Henry  Colliar,  Henry  Smith. 
John  Lethieulier,  Christopher  Pack,  George  Wytham.  and 
others,  members  of  the  said  company,  and  upon  the 
answer,  plea  and  demurrer  of  the  said  Rowland  Wyan, 
John  Dogget,  Henry  Collier  and  John  Lethieulier  put  in 
to  the  said  petition  (the  Governor,  Assistants  and  Fellow- 
ships, tho'  several  times  summoned,  not  appearing)  being 
heard  at  the    Bar  of    this    house,    in    presence    of    counsel 


SALMON  V.   THE  HAMBOROUGH  COMPANY    897 

learned  on  both  sides,  the  said  petition  being  on  appeal  made 
from  a  dismission  in  the  high  Court  of  Chancery,  and  the 
petitioners  bill  there.  Their  Lordships  on  reading  the  said 
petition,  the  answer,  plea  and  demurrer  thereto,  and  the 
said  dismission  and  the  charter  by  which  the  said  Governor 
and  Fellowship  are  incorporated,  and  hearing  what  was 
alleged  on  both  sides,  do  order  that  the  dismission,  for 
so  much  as  concerns  the  said  compan}^  be,  and  do  stand 
reversed,  and  that  the  Lord  Chancellor,  or  the  Lord  Keeper 
of  the  Great  Seal  of  England  for  the  time  being,  do  retain 
the  said  bill.  And  that  the  said  Court  of  Chancery  shall  issue 
forth  the  usual  process  of  that  Court,  and  if  cause  be,  pro- 
cess of  distringas  thereupon  against  the  said  corporation ; 
provided  the  said  process  be  served  one  month  before  the 
return  thereof.  And  if  upon  the  return  of  the  process,  the 
said  corporation  shall  not  file  an  appearance,  or  shall  appear 
and  not  answer,  the  said  bill  shall  be  taken  pro  confcsso,  and 
a  decree  shall  thereupon  pass.  But  in  case  the  said  corpora- 
tion shall  appear  and  answer  within  the  time  aforesaid,  then 
the  Court  of  Chancer}^  shall  proceed  to  examine  what  the 
plaintiff's  just  debt  is,  and  shall  decree  the  said  company 
to  pay  so  much  money  as  the  same  shall  appear  to  amount 
unto,  with  reasonable  damages.  And  in  case  the  corporation 
shall  not  pay  the  sum  decreed  within  ninety  days  after  the 
sen'ice  of  the  said  decree  upon  their  Governor,  Deputy 
Governor,  Treasurer,  Clerk  or  Secretary  for  the  Time 
being;  then  the  lords  Spiritual  and  Temporal  do  further 
order,  adjudge  and  direct,  that  the  Lord  Chancellor  or  Lord 
Keeper  for  the  time  l)eing  shall  order  and  decree,  that  the 
Governor  or  Deputy-Governor  and  the  twenty-four  as- 
sistants of  the  said  company,  or  so  many  of  them  as  by  the 
tenor  of  their  charter  so  constitute  a  quorum  for  the  making 
of  leviations  upon  the  trade,  or  members  of  the  said  com- 
pany, for  the  use  of  the  said  company,  shall  within  such 
time  as  by  the  Lord  Chancellor  or  Keeper  shall  be  thought 
fit,  make  such  a  leviation  upon  every  member  of  the  said 
company  as  is  to  be  contributary  to  the  publick  charge,  as 
shall  be  sufficient  to  satisfv  the  said  sum  to  be  decreed  to 


898  LIABILITY  OF  ORIGINAL   SHAREHOLDERS 

the  plaintiff  in  that  cause,  and  to  collect  and  levy  the  same, 
and  to  pay  it  over  to  the  plaintiff  as  the  Court  shall  direct. 
And  such  a  leviation  is  to  be  put  in  writing,  and  signed  with 
the  hand  of  the  Governor,  Deputy-Governor  and  Assistants 
of  the  aforesaid  company  for  the  time  being,  and  so  many 
of   them,   as   by   the   Constitution   of   the   said   charter  do 
make  a  quorum,  shall  not  make  or  return  such  leviations,  as 
aforesaid,  the  Lord  Chancellor  or  Lord  Keeper  may  issue 
process  of  contempt  against  them,  as  is  usual  against  per- 
sons in  their  natural  capacities.     And  if  by  the  said  time 
so  to  be  limited  by  the  said  Court  of  Chancery,  the  said 
money  so  to  be  assessed,  shall  not  be  paid,  then  and  from 
thenceforth  every  person  of  the  said  company,  upon  such 
a  leviation,   shall  be  made  to  be  liable  in  his  capacity  to 
pay  his    quota    or   proportion    assessed.       And   the   Lord 
Chancellor  or  Lord  Keeper  is  to  order  or  decree,  that  such 
process  shall  issue  against  any   such   member   so   refusing 
or  delaying  to   pay  his   quota   or  proportion,   as   is   usual 
against  persons  charged  by  the  decree  of  the  said  Court, 
for  any  duty  in  their  federal  capacities.     And  if  the  total 
so  returned  and  filed  with   the  register  shall  not  amount 
to  so  much  as  shall  be  sufficient  to  satisfy  the  sum  decreed, 
with  respect  had  to  such   person  as  shall  make  it  appear 
that  they  are  overcharged,  or  ought  not  to  be  charged  at 
all,  then  the  said  Lord  Chancellor  or  Lord  Keeper  for  the 
time   being,   may    from   time   to   time,    order   that   a   new 
leviation  be  made  and   returned  into  the   registers  of   the 
Court  of  Chancery,  of  such  sum  as  shall  be  sufficient,  by 
way    of    supplement    for    that    purpose,  to    the    payment 
whereof   every   individual   person   is  to  be  bound   in   such 
manner  as  aforesaid. 

6  March  1670.  The  Lord  Keeper  on  a  motion 
grounded  on  the  Lords,  ordered  that  the  dismission  stand 
reversed,  and  the  bill  stand  revived,  and  that  process  and 
other  proceedings  issue  as  is  thereby  directed,  and  the 
service  thereby  directed  be  sufficient. 

Accordingly  the  Treasurer  and  Secretary  were  served 
with  a  distringas  against  the  company,  and  copies  of  the 


SALMON  V.   THE  HAMBOROUGH  COMPANY     899 

Lords  Order.  The  sheriff  returned  nulla  bona;  and  no  ap- 
pearance is  made. 

5  July  1 67 1.  Ordered  the  cause  be  put  into  the  paper 
to  be  heard,  and  notice  to  be  given  to  the  Treasurer,  Clerks 
and  Secretary. 

And  now  the  5th  of  July,  1671,  none  appearing  for 
the  defendants,  the  Court  decreed  the  bill  to  be  taken  pro 
confcsso,  and  the  defendants  to  pay  the  plaintiff's  debt,  ac- 
cording to  the  Lord's  order  in  Parliament.^ 


^Compare:  Hume  v.  JJ'aiido  Canal  Co.,  4  Amer.  Law  Mag.  92.  (A 
bill  was  filed  against  the  ]\Ieinbers  of  a  Company  by  a  creditor;  one 
defendant  demurred  on  the  ground  that  under  the  by-laws  he  was  no 
longer  a  member  of  the  Company.  The  bill  charged  that  there  never 
was  any  joint-stock  capital,  that  the  amount  to  be  raised  in  order  to  pay 
the  plaintiff  for  his  work,  was  to  be  raised  by  progressive  assessments 
on  the  stockholders.  The  defendant  demurring  was  a  member  of  the 
Company  at  the  time  the  contract  was  formed.  Desaussure,  C,  held, 
that  the  defendant  was  liable  to  pay  his  proportion  of  the  debt.  The 
decision  is  based  on  our  principal  case.  The  opinion  is  an  interesting 
one,  the  learned  Chancellor  taking  the  position  that  at  common  law  the 
members  of  a  corporation  are  liable  for  its  debts.  Query:  Whether  he 
would  have  regarded  stockholders  as  liable  beyond  the  amount  of  stock 
subscribed  when  there  was  definite  capital  stock?  For  an  interesting 
discussion  of  this  case  and  our  principal  case  see  the  Article  in  i  Amer. 
Law  Mag.  96,  and  the  Article  in  reply,  4  Amer.  Law  Mag.  363.) 

Two  questions  may  be  said  to  be  doubtful  in  regard  to  Salmon  v. 
Hamborough. 

First,  did  the  "leviation"  directed  ever  take  place?  or  did  the 
Doctor,  w^earied  out  by  his  sixteen  years  of  proceedings  in  chancery, 
discontinue  the  proceedings  ? 

Professor  Williston  thinks  that  at  least  the  "leviation"  directed 
actually  took  place.  The  evidence  of  this  is  a  note  by  the  Reporter, 
Vernon,  to  Harvey  v.  East  India  Co.,  2  Vern.  395,  1700,  p.  396, 
Edition  1729:  "In  the  case  between  Dr.  Salmon  and  the  Ham- 
borough  Company,  the  members  in  their  private  persons  were  made 
liable,  the  Company  having  no  goods."  Mr.  Williston,  Hist,  of  the  Law 
of  Business  Corporations,  Select  Essays  in  Anglo-American  Legal  His- 
tory, Vol.  Ill,  p.  230.  It  may  be  doubted,  however,  whether  the  Re- 
porter was  doing  more  than  referring  to  the  principle  of  lawi  enunciated 
in  Doctor  Salmon's  case,  which  was  decided  some  nine  years  before 
the  earliest  case  we  have  from  Vernon's  manuscript,  and  a  few  months 
before  the  future  Reporter,  at  the  age  of  eighteen,  registered  as  a  student 
in  Lincoln's  Inn.  It  is  not  unlikely,  therefore,  that  the  only  information 
Vernon  had  of  Doctor  Salmon  and  his  bill  was  "Cases  in  Chancery," 
the  first  edition  of  which  appeared  in  1697,  or  three  years  before  the 
case  of  Harvey  v.  East  India  Company,  and  that  this  note  is  nothing 
more  than  a  syllabus  of  the  principle  "decided. 

Second :  It  is  not  certain  whether  the  Hamborough  Company  was 
incorporated. 

Fomblanque  says:  "If  it  was,  the  law  of  the  decision  seems  very 
doubtful."  Fomblanque's  Equity.  Vol.  I,  Edition  of  1795,  p.  297,  note 
(p).  Viner  arranges  the  case  under  the  title  "Process  against  Corpora- 
tions", 6  Viner,  310;  but  there  is  nothing  in  his  report  of  the  case  to 
show  that  he  used  any  source  of  information  besides  the  report  in  Cases 
in  Chancery  which  we  have  reprinted. 


900  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 


CARR  V.  IGLEHART. 
In  the  Supreme  Court  of  Ohio,  1854. 

3   Ohio   State  Reports,  457. 

Per  Curiam.  This  is  a  bill  in  chancery  to  collect  the 
amount  due  upon  three  bank  bills,  issued  by  the  Lebanon 
Miami  Banking  Company,  for  the  payment,  in  the  aggre- 
gate, of  the  sum  of  fiye  dollars.  It  is  founded  upon  the  idea 
that  the  defendants,  w^ho  y^^ere  stockholders  in  the  bank  when 
the  bills  were  issued,  are  indiyidually  liable  for  its  debts, 
This  liability  is  not  deduced  from  any  independent  contract 
by  which  they  undertook  to  pay  the  debts,  for  no  such  con- 
tract is  alleged.  Nor  does  it  rest  upon  the  ground  that 
they  haye  receiyed  the  assets  of  the  corporation  which  were 
bound  for  its  liabilities,  for  no  such  fact  is  stated.  Nor  is  it 
pretended  that  there  is,  in  the  charter  of  the  bank,  any  pro- 
yision  that,  either  expressly  or  by  necessary  implication, 
makes  it  stockholders  personally  responsible.  It  is  upon 
neither  of  these  grounds  that  relief  is  sought.  The  ground 
upon  which  we  are  asked  to  sustain  the  bill  is,  that  stock- 
holders in  a  corporation  are  indiyidually  liable  for  its  debts, 
unless,  by  some  proyision  of  the  charter  or  statute  law,  they 
are  exempted  from  such  responsibility.  The  counsel  for  the 
complainant  admits  that  Blackstone,  and  diyers  other  emi- 
nent writers  upon  the  law,  and  also  certain  courts,  have 
entertained  a  contrary  opinion ;  but  he  is  very  clear  they 
were  all  wrong,  and  he  hopes  and  thinks  this  court  will  not 
be  governed  by  such  loose  and  inconsiderate  expressions, 
either  of  text  writers  or  judges. 

After  a  careful  consideration  of  the  elaborate  and 
learned  argument  of  counsel,  we  are  unable  to  perceive  that 
he  has  established  the  liability  of  the  defendants.     We  sup- 


CARR  V.   IGLEHART  901 

pose  that  no  law  is  better  settled  than  that  they  are   not 
liable.  1 

Demurrer  sustained  and  bill  dismissed.^ 


'That  part  of  the  opinion  in  w^hich  the  Court  points  out  that  the 
subject  of  the  suit  is  too  trivial  for  the  cognizance  of  a  court  of  equity 
is  omitted. 

^Compare:  In  re  The  Sheffield  and  South  Yorkshire  Peananent 
Building  Society,  L.  R.  22,  Q.  B.  D.  470,  1889.  (A,  et  al.,  were  some 
of  the  members  of  a  corporation.  A  statute  provided  that  each  share- 
holder should  be  liable  for  the  amount  unpaid  on  his  share,  and  also 
provided  that  the  rules  of  the  Company  shall  provide  a  method  by 
which  a  shareholder  may  withdraw.  A,  et  al.,  not  having  paid  for 
their  shares  in  full,  withdrew,  following  the  rules  prescribed  by  the 
Company.  Within  a  j-ear  the  Compan)-  went  into  liquidation.  In  the 
liquidation  proceedings,  held,  that  A.  et  al.,  were  not  liable  for  the  un- 
paid amounts  on  their  shares.  Cave,  J. :  "If  he  [A]  had  remained 
a  member,  and  had  not  paid  them,  he  would  have  been  'in  arrear,'  and 
be  liable  to  pay  a  fine.  But,  under  the  circumstances  of  the  case,  he  is 
not  liable  at  all.  That  disposes  of  the  case  so  far  as  the  county  court 
judge  decided  it.  But  Mr.  Grosvenor  Woods  took  a  different  point, 
with  which  it  is  necessary  for  us  to  deal.  He  argued  that  persons  who 
unite  together  for  trading  or  making  profits  in  any  way  are,  at  com- 
mon law,  liable  for  all  debts  which  are  incurred  during  the  time  they 
are  members  of  the  association,  and  that,  if  the  association  has  ulti- 
mately to  be  wound  up,  past  members  must  pay  their  shares  of  the 
debts.  As  a  general  rule — apart  from  legislation — that  is  perfectly 
true  with  respect  to  partners,  and  with  respect  to  associations  in  the 
nature  of  partnership  where  there  is  no  incorporation,  but  with  re- 
spect to  corporations  the  case  is  entirely  different  where  the  legisla- 
ture has  not  thought  fit  to  intervene,  or  where  the  charter  under  which 
the  body  is  incorporated  does  not  provide  otherwise.  A  corporation  is 
a  legal  persona  just  as  much  as  an  individual;  and,  if  a  man  trusts  a 
corporation,  he  trusts  that  legal  piersona.  and  must  look  to  its  assets 
for  payment ;  he  can  only  call  upon  individual  members  to  contribute 
in  case  the  Act  or  charter  has  so  provided.") 

For  other  cases  in  accord;  see  Thompson  on  Corporations,  Edition 
of  1910,  §4725,  notes. 


902  LIABILITY   OF  ORIGINAL  SHAREHOLDERS 


UPTON  V.  TRIBILCOCK. 
In  the  Supreme  Court  of  the  United  States,  1875. 

91  United  States  Reports,  45. 

Error  to  the  Circuit  Court  of  the  United  States  for  the 
District  of  Iowa. 

Mr.  Justice  Hunt :  The  plaintiff,  as  assignee  of  the 
Great  Western  Insurance  Company,  a  corporation  organized 
under  the  statute  of  the  State  of  Ilhnois,  brought  his  action 
against  the  defendant,  alleging  that  he  was  a  stockholder  of 
said  corporation  to  the  amount  of  ten  thousand  dollars;  that 
twenty  per  cent,  only  had  been  paid  upon  his  stock ;  alleging 
also  the  bankruptcy  of  the  company,  the  appointment  of  the 
plaintiff  as  assignee,  and  the  demand  of  the  amount  claimed, 
and  seeking  to  recover  the  eight  thousand  dollars  remaining 
unpaid.  The  complainant  averred  that  the  defendant  did 
verbally  agree  to  become  such  stockholder,  and,  with  intent 
to  become  such,  did  accept  a  certificate  for  the  same  whereby 
he  became  bound  to  pay  the  full  amount  thereof,  as  follows : 
Five  per  cent,  upon  delivery  of  the  certificates;  five  per 
cent,  in  three  months ;  five  per  cent,  in  six  months ;  five  per 
cent,  in  nine  months ;  and  the  residue  whenever  called  for 
by  the  company,  according  to  the  charter  of  the  company 
and  the  laws  of  the  State  of  Illinois. 

The  defence  is,  that  the  subscription  was  obtained  by 
the  fraudulent  representations  of  the  agent  of  the  company 
to  the  effect  that  the  defendant  would  only  be  responsible 
for  twenty  per  cent,  of  the  subscription  made  by  him;  that 
afterwards  he  executed  his  promissory  note  for  the  twenty 
per  cent.,  and  secured  the  same  by  a  mortgage  of  real  estate ; 
''and  that  thereupon  (in  the  language  of  the  answer),  and 
pursuant  to  agreement,  said  subscription  contract  was  sur- 
rendered and  delivered  up  to  defendant;"  and  also  in  the 
language  of  the  answer,  "that  said  note  was  a  full  payment 
and  discharge  of  all  obligations  and  personal  liabilities  of  all 


UPTON  v.  TRIBILCOCK  903 

kinds  whatsoever  by  reason  of  his  contract  so  made  and  the 
relations  created  by  the  deHvery  to  him  of  said  certificate, 
and  said  note  was  received  in  full  payment." 

In  his  third  amended  answer,  the  defendant  avers  that 
he  did  subscribe  for  stock  on  the  conditions  mentioned ;  that 
after  that  contract  was  made,  and  before  a  certificate  was 
delivered  to  him,  and  before  executing  his  note,  an  agree- 
ment was  made  with  Overton  on  behalf  of  the  company  to 
the  effect  before  stated ;  and  thereupon  he  made  and  delivered 
the  note  and  mortgage  which  was  received  by  Overton  in 
full  discharge  and  payment  of  the  amount  due  on  his  said 
subscription. 

The  evidence  contained  in  the  bill  of  exceptions  leaves 
the  case  substantially  as  is  averred  in  the  pleadings.  The 
defendant  offered  evidence  tending  to  prove  representations 
that  twenty  per  cent,  only  was  required  to  be  paid;  that 
eighty  per  cent,  was  now  assessable,  and  created  no  per- 
sonal liability ;  that  the  agent,  Overton,  exhibited  a  blank 
form  of  certificate  with  the  word  "non-assessable"  printed 
across  the  face,  "being  a  copy  similar  to  that  subsequently 
filled  up  and  delivered  to  defendant  by  Overton."  It  ap- 
pears that,  before  the  defendant  made  his  subscription,  a 
copy  of  the  charter  and  by-laws  had  been  furnished  to  him 
by  Overton;  and  that,  in  returns  made  by  the  company  to 
the  Auditor  of  the  State  of  Illinois  of  the  amount  of  "un- 
paid subscribed  capital  for  which  the  subscribers  were 
liable,"  the  amount  of  the  defendant's  note  was  included. 

The  case  standing  in  this  position  upon  the  pleadings 
and  the  evidence,  the  plaintiff'  requested  the  court  to  charge 
the  jury  as  follows  : 

2d.  That  any  contract  between  the  company  or  its 
agents  and  the  stockholders,  limiting  their  liability  as  to 
unpaid  installments  of  stock,  is  void  as  to  creditors  of  the 
company,  and  as  to  the  rights  of  the  assignee  who  repre- 
sents the  creditors  in  this  action. 

3d.  That  if  the  jury  find  from  the  evidence  that  the 
defendant,  J.   D.   Tribilcock,  became  a  stockholder  of  the 


9U4  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

Great  Western  Insurance  Company  in  the  month  of  Au- 
gust, 1870,  and  that  he  continued  to  own  and  hold  said  stock 
until  after  the  insolvency  of  the  company  in  February, 
1873,  that  any  representations  by  any  agent  of  the  com- 
pany at  the  time  defendant  became  such  stockholder  as  to 
the  matter  of  his  liability  for  eighty  per  cent,  of  the  stock, 
or  any  indorsement  on  the  stock  of  the  word  "non-assess- 
able," are  wholly  immaterial,  and  constitute  no  defence  to 
this  action. 

This  request  was  refused. 

It  is  hardly  necessary  to  argue  the  proposition,  that 
if  the  defendant  became  a  holder  of  shares  of  the  capital 
of  this  insurance  company  to  the  amount  of  $10,000. 
and  had  paid  but  twenty  per  cent,  thereof,  its  creditors  were 
entitled  to  require  of  him  the  payment  of  the  eighty  per 
cent,  remaining  unpaid.  The  acceptance  and  holding  of  a 
certificate  of  shares  in  an  incorporation  makes  the  holder 
liable  to  the  responsibilities  of  a  shareholder.  Brigham  v. 
Mead,  10  Allen,  245;  Buff.  City  R.  R.  Co.  v.  Douglass,  14 
N.  Y.  336;  Seymour  v.  Sturges,  26  id.  134.  The  capital 
stock  of  a  moneyed  corporation  is  a  fund  for  the  payment 
of  its  debts.  It  is  a  trust  fund,  of  which  the  directors  are  the 
trustees.  It  is  a  trust  to  be  managed  for  the  benefit  of  its 
shareholders  during  its  life,  and  for  the  benefits  of  its  credit- 
ors in  the  event  of  its  dissolution.  This  duty  is  a  sacred  one, 
and  cannot  be  disregarded.  Its  violation  will  not  be  under- 
taken by  any  just-minded  man,  and  will  not  be  permitted  by 
the  courts.  The  idea  that  the  capital  of  a  corporation  is  a 
football  to  be  thrown  into  the  market  for  the  purposes  of 
speculation,  that  its  value  may  be  elevated  or  depressed  to 
advance  the  interests  of  its  managers,  is  a  modern  and 
wicked  invention.  Equally  unsound  is  the  opinion,  that  the 
obligation  of  a  subscriber  to  pay  his  subscription  may  be 
released  or  surrendered  to  him  by  the  trustees  of  the 
company.  This  has  been  often  attempted,  but  never  suc- 
cessfully. The  capital  paid  in,  and  promised  to  be  paid  in, 
is  a  fund  which  the  trustees  cannot  squander  or  give  away. 


UPTON  V.  TRIBILCOCK  905 

They  are  bound  to  call  in  what  is  unpaid,  and  carefully  to 
husband  it  when  received.  Sazvyer  v.  Hoag,  ly  Wall.  6io; 
Ttickennan  v.  Brown,  t^t^  N.  Y.  297;  Ogilvie  v.  Knox  Ins. 
Co.,  22  How.  380;  Osgood  v.  Laytin,  3  Keys,  521 ;  37  How. 
Pr.  63,  affg.  48  Barb.  463;  Gross,  111.  Stat.,  p.  356,  §  16. 

We  are  of  the  opinion  that  the  alleged  representation  of 
the  non-assessability  of  the  stock  held  by  him  was  quite' im- 
material. It  was  so  held  in  Ogilvie  v.  Knox  Ins.  Co.,  22 
How.  380.^ 

Judgment  reversed  and  new  trial  had.^ 


'In  the  remainder  of  the  opinion  the  Court  holds  (ij  that  the 
alleged  misrepresentations  relied  on  by  the  defense  were  as  to  the  legal 
effect  of  the  defendant's  subscription,  and  that  a  misrepresentation  or 
misunderstanding  of  law' will  not  vitiate  a  contract;  and  (2),  assuming 
that  fraudulent  misrepresentations  were  made  which  would  have  en- 
titled him  to  have  rescinded  the  contract,  the  question  whether  he  had 
exercised  due  deligence  in  discovering  the  fraud  and  repudiating  the 
subscription  was  not  properly  placed  before  the  jury  by  the  trial  Court. 
On  these  two  points  Chief  Justice  Waite,  and  Justices  Miller  and  Brad- 
Icy  dissented. 

'For  further  cases  in  accord,  see  Thompson  on  Corporations,  §3924, 
note  23. 

The  matter  discussed  in  our  principal  case  is  often  the  subject  of 
statutory  regulation.  For  a  typical  statute  and  case  arising  under  such 
statute,  see 

In  re  Remington  automobile  and  Motor  Co.,  153  Fed.  345,  1907. 
(Chap.  185,  Laws  of  New  Jersey,  1896,  provided:  "Where  the  whole 
capital  of  a  corporation  shall  not  have  been  paid  in,  and  the  capital  paid 
shall  be  insufficient  to  satisfy  its  debts  and  obligations,  each  stockholder 
shall  be  bound  to  pay  the  sum  necessary  to  complete  the  amount  of  such 
share,  as  fixed  by  the  charter  of  the  corporation  *  *  *  "  ^  Com- 
pany issued  stock  to  A  at  $25  per  share  of  the  par  value  of  $100  as  full 
paid  and  non-assessible.  Held,  that  the  statute  quoted  required,  on  the 
bankruptcy  of  the  Company  an  assessment  of  $75  a  share  on  A,  if  that 
sum  was  required  to  pay  the  debts  of  the  Company  "without  discussing 
the  question  on  general  principles  of  corporation  law."  For  other 
cases  in  accord,  see  Thompson  on  Corporations,  Edition  of  1910,  §3905.) 

On  the  question  of  li'hat  amounts  to  an  estoppel,  assuming  that 
there  has  been  sufficient  fraud  in  obtaining  the  subscription  to  zvarrant 
the  stockholder  in  cancelling  it,  see 

Martin  v.  South  Salem  Land  Co.,  94  Va.  28,  1896.  (A  subscribed 
to  the  stock  of  the  B  Co.  The  subscription  was  induced  by  fraud ; 
but  A  took  no  steps  to  repudiate  his  contract  until  the  B  Co.  was 
insolvent,  and  a  creditor's  bill  had  been  brought  against  A  and  other 
stockholders  of  the  B  Co.  Held,  that  A  was  liable  for  his  unpaid 
subscription.  I'uchanan,  .1.  :  "A  partj^  who  had  been  induced  to  sub- 
scribe for  stock  in  a  corporation  by  false  or  fraudulent  representa- 
tions as  to  a  material  fact  upon  which  he  had  the  right  to  rely, 
and  did  rely,  is  entitled  to  have  the  contract  rescinded  in  the  same 
manner  as  if  the  question  had  arisen  between  two  natural  persons, 
provided  the  question  arises  between  the  contracting  parties  and  the 
rights  of  third   persons  are  not   involved,     t    IMorawetz   on   Corp.,   sec. 


906  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

io8;  2  Thompson  on  Corp.,  sec.  1361  ;  i  Cook  on  Stocks  &  Stock- 
holders, &c.,  sees.  151-161. 

"A  contract  procured  by  fraud  is  not  void,  but  voidable  only,  at 
the  option  of  the  party  defrauded.  It  is  binding  upon  him  until  re- 
scinded, and,  if  before  he  exercises  the  option  to  rescind,  innocent  third 
parties  have,  in  reliance  on  the  fraudulent  contract,  acquired  rights 
which  would  be  prejudiced  by  its  rescission  they  may  generally  have 
it  enforced  for  their  benetit,  although  the  party  by  whose  fraud  it  w.'is 
procured  could  not  do  so.  Oakes  v.  Tiirquand,  &c.  (House  of  Lords), 
2  Eng.  &  Irish  Appeal  Cases,  L.  R.  325;  Tcnnent  v.  City  of  Glasgow 
(House  of  Lords),  4  Appeal  Cases,  L.  R.  615;  2  Thompson  on  Corp., 
sec.   1363 ;  2   Morawtetz  on  Corp.,   sec.  839. 

"This  principle  is  founded  in  reason  and  justice.  If  one  of  two 
innocent  persons  must  suffer  from  the  misconduct  of  a  third,  the 
burden  must  fall  upon  the  one  whose  conduct  enabled  the  third 
person  to  perpetrate  the  wrong  complained  of.")  See  further  in  ac- 
cord cases  cited  in  Thompson  on  Corporations,  Edition  of  1910,  sec. 
4924  notes,  especially  note  23 ;  also,  Amer.  Digest,  tit.  Corporations, 
Key  No.  80  (10). 

On  what  amounts  to  a  contract  of  subscription,  see  Haivley  v. 
Upton,  102  U.  S.  314,  1880:  (A,  by  his  bond,  acknowledged  the 
receipt  from  an  insurance  company  of  ten  shares  of  its  capital  stock, 
and  agreed  to  pay  $200  therefor,  in  instalments, — one-fourth  on  the 
receipt  of  the  stock  certificate,  and  the  remainder  in  three  equal 
amounts  at  three,  six,  and  nine  months  from  January  7,  1871,  the  date  of 
the  bond.  He  paid  on  executing  it  $25,  and  his  name  was  entered  as 
a  stockholder  on  the  books  of  the  company.  The  certificate  was  not 
delivered  or  demanded.  In  1872,  the  company  became  bankrupt.  Held, 
that  the  assignee  was  entitled  to  recover  of  A  the  unpaid  instalments. 
Waite,  C.  J.  :  "It  cannot  be  doubted  that  one  who  has  become  bound 
as  a  subscriber  to  the  capital  stock  of  a  corporation  must  pay  his 
subscription  if  required  to  meet  the  obligations  of  the  corporation.  A 
certificate  in  his  favor  for  the  stock  is  not  necessary  to  make  him  a 
subscriber.  All  that  need  be  done,  so  far  as  creditors  are  concerned, 
is  that  the  subscriber  shall  have  bound  himself  to  become  a  con- 
tributor to  the  fund  w^hich  the  capital  stock  of  the  corporation  repre- 
sents. If  such  an  obligation  exisfs,  the  courts  can  enforce  the  con- 
tribution when  required.  After  having  bound  himself  to  contribute, 
lie  cannot  be  discharged  from  the  obligation  he  has  assumed  until  the 
contribution  has  actually  been  made  or  the  obligation  in  some  lawful 
way    extinguished")  ;    Amer.    Dig.    tit.    Corporations,    Key    Nos.    75-77. 

On  circumstances  whicli  will  release  a  stockholder  from  his  sub- 
scription, see  Amer.  Dig.  tit.  Corporations,  Key  No.  84;  also 

Potts  V.  Wallace,  146  U.  S.  689.  1889.  (The  trustee  for  the  benefit 
of  creditors  of  a  Company  brought  an  action  against  W,  a  stock- 
holder of  record,  to  collect  the  amount  of  the  stock  subscribed  by 
him.  W,  defended,  on  the  ground  that  he  had  offered  to  pay  the 
subscription  when  the  Company  was  solvent,  and  the  Company  re- 
fused the  tender.  Shiras,  /.  :  "It  may  be  readily  conceded  that  if  the 
evidence  in  the  case  disclosed  that  the  defendant's  offer  of  payment 
and  performance  was  refused  by  the  company  while  solvent,  and  that 
the  defendant  availed  himself  of  such  refusal,  and  declared  himself 
off  from  his  contract  of  subscription,  the  defendant  was  thereby 
exonerated  from  the  obligation  of  his  subscription,  and  that  his 
liability  to  pay  would  not  be  revived  by  the  subsequent  insolvency  of 
the  company  and  by  the  demands  of  the  assignee."  The  Court  being 
of  opinion  that  the  record  showed  that  it  was  doubtful  if  W  ever 
oft'ered  to  pay  his  subscription,  and  in  any  event,  did  not  show  that 
on  the  refusal  to  accept  payment,  he  repudiated  his  contract  of  sub- 
scription,  refused   to  consider  the  defense  good.) 


LOUISIANA  PAPER  COMPANY  v.  WAPLES      .      907 


LOUISIANA  PAPER  COMPANY  v.  WAPLES. 

In  the  Circuit  Court  of  the  .United  States  for  the 
District  of  Louisiana,  1877. 

3  Woods'  Reports,  34. 

Error  to  the  district  court. 

The  action  was  brought  in  the  district  court  by  the  trus- 
tees in  bankruptcy  of  the  Louisiana  paper  manufactur- 
ing company,  to  recover  of  the  defendant,  who  was  a  stock- 
holder in  the  company,  a  balance  alleged  to  be  due  and  un- 
paid on  his  subscription  of  stock. 

The  company  was  established  under  a  general  law  of 
this  state  (Rev.  Stat.,  p.  183)  which  provided  for  the  or- 
ganization of  corporations  for  works  of  public  improve- 
ment, manufacturing  and  other  purposes,  by  the  adoption 
of  a  charter  by  the  stockholders,  and  which  directed  that 
every  charter  should  contain,  among  other  things,  the  name 
of  the  corporation,  its  domicile,  a  description  of  the  business 
which  it  proposed  to  cari^  on,  a  statement  of  the  amount  of 
the  capital  stock,  the  number  of  shares,  the  amount  of  each 
share,  and  the  time  when  and  the  manner  in  which  payment 
on  stock  subscribed  should  be  made.  The  law  also  provided 
that  the  charter  of  corporations  organized  under  it  should 
be  recorded  in  the  office  of  the  recorder  of  mortgages  and 
published  in  a  newspaper  at  the  domicile  of  the  corporation, 
once  a  week  for  at  least  thirty  days.  The  statute  also  de- 
clared :  "No  stockholder  shall  ever  be  held  liable  or  re- 
sponsible for  the  contracts  or  faults  of  such  corporation  in 
any  further  sum  than  the  unpaid  balance  due  to  the  com- 
pany on  the  shares  owned  by  him." 

The  third  section  of  the  charter  of  the  Louisiana  paper 
manufacturing  compau}-  declared,  "the  capital  stock  of  this 
corporation  is  hereby  fixed  at  the  sum  of  sixty  thousand  dol- 
lars, divided  into  six  hundred  shares  of  one  hundred  dol- 
lars each ;  twenty-five  dollars  on  each  share  to  be  paid  at 


908  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

the  time  of  the  organization  of  this  corporation,  and  five 
dollars  on  each  share  in  thirty  days,  five  dollars  in  sixty 
days,  and  five  dollars  in  ninety  days  after  said  organization. 
The  balance  on  each  share,  or  any  portion  of  such  balance, 
shall  not  be  called  for,  unless  with  the  assent  of  three-fourths 
of  the  stockholders,  and  then  only  to  increase  the  business 
of  the  corporation. 

The  defendant  subscribed  twenty-five  shares,  and  paid 
up  the  installment  of  twenty-five  dollars  and  the  three  in- 
stallments of  five  dollars  each,  mentioned  in  said  third  sec- 
tion, making  a  total  of  forty  per  cent,  of  the  stock  sub- 
scribed. 

The  suit  was  to  enforce  the  payment  of  the  remaining 
sixty  per  cent,  of  the  stock  for  the  benefit  of  the  creditors 
of  the  corporation. 

No  meeting  of  the  stockholders  had  ever  been  held  to 
give  their  assent  to  the  calling  in  of  the  unpaid  sixty  per 
cent,  of  the  stock  subscribed,  nor  had  such  assent  been 
given. 

The  defense  was  that  the  sixty  per  cent,  sued  for  was 
subscribed  and  to  be  paid  only  according  to  the  terms  of 
the  charter,  on  condition  that  it  should  not  be  called  in  un- 
less with  the  assent  of  three-fourths  of  the  stockholders,  and 
then  only  to  increase  the  business  of  the  corporation,  and 
that  such  assent  had  never  been  given. 

The  district  court  charged  the  jury  that  there  was  no 
liability  of  the  defendant  beyond  the  forty  per  cent,  of  his 
stock  paid  up,  unless  the  remaining  sixty  per  cent.,  or  some 
part  of  it,  had  been  called  in  by  the  assent  of  three-fourths 
of  the  stockholders,  for  the  purpose  of  increasing  the  busi- 
ness of  the  corporation. 

This  charge  is  assigned  for  error. 

Woods,  Circuit  Judge.  This  is  not  the  case  where  there 
has  been  a  subscription  of  stock,  and  the  by-laws  or  other 
regulations  adopted  by  the  stockholders  or  directors  pre- 
scribe how  the  subscriptions  shall  be  called  in,  or  the  char- 


k 


LOUISIANA  PAPER  COMPANY  v.  WAPLES  909 

ter  itself  declares  in  wliat  installments  the  directors  niav  call 
in  the  stock  payments. 

In  such  a  case,  there  can  be  no  doubt  that  the  entire 
stock  subscribed,  whether  called  in  by  the  directors  or  not.  is 
a  fund  for  the  satisfaction  of  the  debts  of  the  corporation, 
and  its  payment  can  be  enforced.  Such  regulations  only  per- 
tain to  the  administration  of  the  affairs  of  the  corporation. 

In  this  case,  the  charter,  which  was  required  to  be  re- 
corded in  a  public  office,  and  published  in  a  newspaper  at  the 
domicile  of  the  corporation,  prescribed  the  installments  by 
which  forty  per  cent,  of  the  stock  subscribed  should  be  paid, 
and  then  declared  that  the  residue,  or  any  portion  thereof, 
should  not  be  called  for  unless  with  the  assent  of  three- 
fourths  of  the  stockholders,  and  then  only  to  increase  the 
business  of  the  corporation. 

The  rule  with  regard  to  unpaid  subscriptions  of  stock 
is  this,  that  whatever  sum  is  subscribed  by  the  stockholders, 
and  held  out  to  the  public  as  the  stock  of  the  corporation,  is 
liable  to  be  called  in  for  the  payment  of  its  debts,  even 
though  the  directors  may  refuse  to  make  the  call :  Purton 
V.  N.  O.  &  C.  Railroad  Co.,  3  La.  An.,  19. 

The  power  conferred  upon  directors  to  call  in  install- 
ments upon  the  shares,  is  a  discretionaiy  power;  but  that 
discretion  is  merely  modal  relating  to  the  time  and  manner 
of  making  payments.  When  the  wants  of  the  company  re- 
quire those  payments,  it  becomes  the  duty  of  the  directors  to 
cause  them  to  be  made,  as  much  so  as  to  require  payment  of 
debts  due  the  company.  It  is  not  discretionary  with  the 
directory  to  say  whether  or  not  the  debts  of  the  company 
shall  be  paid  when  they  have  the  power  to  compel  payment : 
Ward  V.  GriswoldvUlc  Man.  Company,  16  Conn.,  601. 

These  doctrines  are  well  established.  Do  they  apply  to 
the  case  in  hand?  It  is  to  the  charter  of  a  corporation  that 
reference  is  to  be  made  to  determine  the  rights  of  the  pub- 
lic:     Stark  V.  Burke,  9  La.  An.,  341. 

Now,  looking  at  the  charter  of  the  Louisiana  i)aper 
manufacturing  company,  what  was  the  contract  which  llie 


910  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

public  was  advised  the  stockholders  had  entered  into  with 
the  corporation?  Not  to  pay  their  subscriptions  absolutely, 
nor  to  pay  them  when,  in  the  discretion  of  the  directors,  it 
might  be  necessary  for  the  wants  of  the  company.  No  obli- 
gation was  assumed  to  pay  any  more  than  forty  per  cent, 
of  the  stock  subscribed,  unless  upon  the  vote  of  three-fourths 
of  the  stockholders,  and  then  for  a  particular  purpose. 
Clearly,  as  between  the  corporation  and  the  stockholders,  the 
unpaid  stock  above  forty  per  cent,  could  not  be  called  in  ex- 
cept on  the  terms  prescribed  by  the  charter.  The  public,  the 
creditors  of  the  corporation,  are  in  no  stronger  position  than 
the  corporation  itself,  for  the  charter  which  informed  the 
public  of  the  amount  of  the  capital  stock  of  the  corporation, 
also  gave  notice  that  the  stockholders  were  under  no  obliga- 
tion to  pay  more  than  forty  per  cent.,  except  on  their  own 
vote,  carried  by  a  majority  of  three-fourths,  and  for  a  par- 
ticular purpose. 

If  the  directors  had  called  a  meeting  of  the  stockholders 
to  vote  on  the  question  of  calling  in  the  unpaid  sixty  per 
cent,  of  the  stock,  and  the  stockholders  had  refused  their 
assent,  would  it  have  been  the  duty  of  the  directors,  would 
they  have  had  any  power,  to  call  .it  in,  notwithstanding  the 
adverse  vote  ?  Clearly  not.  Is  their  duty  to  call  in  the  stock 
any  clearer,  or  their  power  any  greater  because  no  such  meet- 
ing has  been  called  and  no  such  vote  taken  ? 

The  stockholders  have  made  their  contract  with  the 
corporation,  the  public  have  been  explicitly  advised  of  its 
terms,  and  the  stockholders,  therefore,  can  only  be  held  to 
perform  what  they  have  agreed  to  do.  The  company  can 
claim  no  more,  nor  can  the  creditors  of  the  corporation 
say  they  have  been  misled. 

In  my  judgment,  the  stockholders  are  not  liable  to  pay 
the  unpaid  sixty  per  cent,  until  the  same  has  been  called  in 
by  a  three-fourths  vote  of  the  stockholders,  for  the  purpose 
of  increasing  the  business  of  the  corporation.  Such  residue 
is  not  due  until  after  such  a  vote,  and  the  law  of  this  State 
declares  that  the  stockholder  of  an  incorporated  company 


LOUISIANA  PAPER  COMPANY  v.  WAPLES  911 

is  only  liable  to  the  company  for  the  unpaid  balance  due  to 
the  company  on  the  shares  owned  by  him.  The  following 
authorities  hav-e  been  consulted,  and  tend  to  sustain  the  Views 
expressed :  Bur.  &  Mo.  River  Railroad  Co.  v.  Boestler, 
15  Iowa,  555;  Penobscot  &  Kennebec k  Railroad  Co.  v. 
Dunn,  39  Maine,  587 ;  Phila.  &  West  Chester  Railroad  Co. 
V.  Hickman,  28  Pa.  St.,  318;  Carlisle  v.  Cahawba  &  Marion 
Railroad  Co.,  4  Ala.  N.  S.,  70. 

It  results  from  these  views  that  there  was  no  error  in 
the  charge  of  the  district  court.  Its  judgment  is,  therefore, 
afifirmed.^ 


^Accord:  Bent  v.  Underdoivn,  156  Ind.  516,  1900.  (The  articles 
of  association  of  the  A  Company  provided  that  the  stockholders  should 
never  be  required  to  pay  more  than  15  per  cent,  of  their  subscrip- 
tions. These  articles  wfere  recorded  as  required  by  law  in  two  public 
offices  of  the  State.  The  A  Company  becoming  insolvent,  B  was  ap- 
pointed Receiver.  Held,  that  B  could  not  recover  from  C,  a  stock- 
holder, more  than  15  per  cent,  of  his  subscription.  Monks,  J. :  "The 
charter  of  a  corporation  formed  under  a  general  law,  consists  of  its 
articles  of  association  and  the  law  under  which  it  is  organized.") 


912  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 


LANE'S  APPEAL. 
In  the  Supreme  Court  of  Pennsylvania,  1884. 

105  P ennsylvania  Reports,  49.' 

Mr.  Justice  Green. 

In  this  case  a  bill  in  equity  was  filed  by  certain  credit- 
ors of  the  Philadelphia  and  Susquehanna  Blue  Stone  Com- 
pany, suing  as  well  for  themselves  as  for  all  other  creditors 
who  might  become  parties  thereto,  against  the  company  and 
the  holders  of  its  capital  stock,  for  the  purpose  of  compelling 
the  payment  of  the  unpaid  capital  stock  by  the  stockholders 
in  order  that  the  same  might  be  applied  to  the  payment  of 
the  debts  due  the  plaintiffs.  The  bill  alleged,  and  the  master 
found,  that  the  defendant  company  was  incorporated  under 
the  general  corporation  law  of  April  29th,  1874,  that  the 
capital  stock  was  fixed  at  $24,000,  divided  into  240  shares  at 
$100  each,  that  a  part  only  of  the  stock  had  been  paid  in, 
that  the  defendants  were  stockholders  at  the  time  of  the 
assignment  made  by  the  company  for  the  benefit  of  its  credi- 
tors, and  were,  indebted  to  the  company  in  certain  sums, 
which  are  set  forth  in  detail,  for  their  unpaid  subscriptions  to 
the  capital  stock,  that  the  company  was  wholly  insolvent,  and 
all  its  available  assets,  except  the  balances  due  upon  its 
capital  stock,  exhausted ;  that  neither  the  compan}^  nor  its 
assignee  had  made  any  call  or  assessment  upon  the  stock- 
holders to  pay  in  the  unpaid  portion  of  the  capital  stock,  but, 
on  the  contrary,  had  refused  to  do  so,  and  that  payment  of 
such  unpaid  balances  of  the  capital  stock,  or  of  some  part 
thereof,  was  necessaiy  for  the  payment  of  the  debts  due  the 
plaintiffs.  The  bill  prayed  for  an  account  of  the  amounts  re- 
maining unpaid  upon  the  capital  stock,  and  for  a  decree  that 
the  stockholders  pay  whatever  amounts  were  due  by  any  of 
them  upon  previous  assessments,  and  also  that  an  assessment 


'  The  Reporter's  statement  of  the  facts,  and  his  notes  of  the  argu- 
ments of  counsel  are  omitted. 


LANE'S  APPEAL  913 

be  levied  for  so  much  of  the  balances  due,  and  not  previously 
called  for,  as  might  be  necessary  to  pay  the  ascertained  debts 
of  the  corporation,  and  prayed  also  for  the  appointment  of  a 
receiver  to  whom  the  monies  collected  should  be  paid,  and 
for  general  relief.  Most  of  the  matters  alleged  in  the  bill 
were  admitted  in  the  various  answers  filed,  and  such  as  were 
material  and  not  admitted  were  found  by  the  master.  The 
debts  due  the  plaintiffs  were  ascertained  to  be  upwards  of 
$8,000,  of  which  the  sum  of  $7,036.93  was  due  to  John 
Maxwell,  who  had  obtained  judgment  for  the  same.  The 
amounts  of  unpaid  capital  stock  were  in  the  neighborhood 
of  $10,000,  the  whole  of  which  was  decreed  to  be  paid  to  a 
receiver. 

The  chief  contention  before  the  master,  as  in  this  Court, 
was  upon  the  liability  of  the  stockholders  in  this  proceeding. 
It  was  contended,  on  behalf  of  the  defendants,  that  they 
could  not  be  called  upon  by  bill  in  equity,  as  proposed  in  this 
case,  for  two  reasons  :  First.  Because  the  complainants  have 
a  complete  and  adequate  remedy  at  law  specifically  provided 
by  the  Act  of  29th  April,  1874,  under  which  the  company 
was  incorporated ;  and.  Second.  That  the  plaintiff,  John 
Maxwell,  the  principal  creditor,  had  a  complete  and  ade- 
quate remedy  by  attachment  in  execution  upon  his  judg- 
ment. 

We  will  consider  these  defences  separately  and  in  their 
order. 

The  remedy  at  law  which  it  is  said  could  be  resorted  to 
by  the  plaintiffs  is  that  which  is  provided  by  the  fourteenth 
and  fifteenth  sections  of  the  Act  of  1874.  The  fourteenth 
section  is,  so  far  as  it  relates  to  the  present  controversy,  in 
the  following  words,  viz. :  "The  stockholders  in  each  of 
said  corporations  shall  be  liable  in  their  individual  capacity 
to  the  amount  of  stock  held  by  each  of  them,  for  all  work  or 
labor  done,  or  materials  furnished,  to  carry  on  the  operations 
of  each  of  said  corporations."  The  fifteenth  section  pro- 
vides the  method  of  proceeding  to  enforce  the  liabilities 
created  by  the  fourteenth. 


914  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

It  will  be  perceived  at  once  that  the  liability  established 
by  the  fourteenth  section  is  of  a  special  and  extremely  lim- 
ited character.  The  stockholder  is  made  directly  liable 
for  work  and  labor  done,  and  for  materials  furnished  to 
carry  on  the  operations  of  the  corporations.  But  two  kinds 
of  indebtedness  only  are  imposed  upon  the  stockholders,  in- 
debtedness for  labor  and  indebtedness  for  materials  fur- 
nished. No  other  form  or  species  of  debt  of  the  corporation 
can  be  collected  from  the  stockholder  under  this  section. 
Moreover,  the  liability  created  by  this  section  is  a  direct 
liability  from  the  stockholder  to  the  creditor,  and  it  exists 
to  the  amount  of  the  stock  held  by  the  stockholder,  without 
any  reference  to  the  question  whether  it  has  been  paid  for  or 
not.  Hence  the  stockholder,  although  he  has  paid  in  full  to 
the  corporation  for  his  stock,  is  nevertheless  still  liable  to 
the  extent  of  the  whole  value  of  his  stock  to  the  two  classes 
of  creditors  named. 

This  liability  is,  of  course,  of  a  purely  statutory  char- 
acter, having  no  existence  outside  of  the  legislation,  and 
whenever  it  is  invoked  it  must  be  enforced  in  the  very  man- 
ner prescribed  by  the  other  portions  of  the  Act.  If  that  kind 
of  remedy  is  not  literally  pursued  when  that  particular  liabil- 
ity is  proposed  to  be  enforced,  then  there  can  be  no  re- 
cover}^  Such  were  the  decisions  of  this  court  in  many 
cases,  notably  in  Patterson  v.  Lane,  1 1  Cas.,  275  ;  Hoard 
V.  Wilcox,  IT  Wr.  51;  Brinham  v.  The  Wellersburg  Coal 
Co.,  Id.,  43;  Youghiogheny  Shaft  Co.  v.  Evans,  22  P.  F.  S., 
331;  Means'  Appeal,  4  Norr.,  75.  These  were  decisions 
under  other  Acts,  principally  the  manufacturing  law  of  1849, 
but  the  controlling  idea  of  the  whole  of  them  was  that  the 
liability  and  the  remedy  were  special  and  statutory  and 
therefore  the  provisions  of  the  statute  must  be  strictly  pur- 
sued. Nothing  more  than  this  was  decided  in  any  of  them. 
Thus  in  Patterson  v.  Lane,  which  was  under  the  Act  of 
1849,  the  9th  section  of  the  Act  provided  that  the  stock- 
holders should  be  individually  liable  for  all  the  debts  and 
contracts  of  the  corporation,  to  the  amount  remaining  unpaid 


LANE'S  APPEAL  915 

on  their  shares  respectively,  until  the  whole  amount  of  the 
capital  stock  was  paid  in  and  a  certificate  by  the  officers  to 
that  effect  was  made  and  recorded.  It  was  alleged  that  a 
false  certificate  had  been  made  as  to  the  amount  of  stock 
paid  in,  and  that  the  whole  had  not  been  paid,  and  a  bill  in 
equity  was  filed  against  certain  stockholders  to  enforce 
their  individual  liability.  But  we  held  that  such  a  bill  would 
not  lie  because  by  the  23d  section  a  special  mode  of  proceed- 
ing for  that  purpose  was  provided  and  it  must  be  strictly  pur- 
sued. This  was  the  whole  of  that  decision.  Precisely  the 
same  doctrine  was  held  and  applied  in  Hoard  v.  Wilcox, 
though  the  source  of  individual  liability  was  different,  and 
the  defect  in  the  proceeding  was  different,  to-wit,  the  cor- 
poration was  not  joined  as  required  by  the  statute.  Thomp- 
son, J.  said,  on  p.  58 :  "It  is  veiy  evident  that  the  remedy 
of  the  statute  was  not  followed  in  these  proceedings,  and  it 
is  also  quite  apparent  on  the  face  of  the  lease,  that  it  is  un- 
der the  statute  that  they  seek  to  make  the  defendants  answer- 
able." He  said  also:  "The  remedy  for  the  collection  of 
demands  against  such  institutions  is  therefore  statutory  and 
special  and  must  be  followed.  This  we  have  lately  held  in 
Brinham,  et  oL,  v.  The  Wellersburg  Co.,  ct  oL,  ante,  p.  43, 
in  obedience  to  the  rule  of  Ihe  Act  of  1806  requiring  the 
remedy  prescribed  by  a  statute  to  be  pursued."  The  other 
cases  referred  to  above  were  mere  repetitions  of  the  same 
doctrine  applied  to  the  facts  involved  in  them. 

In  no  one  of  these  or  any  other  cases  cited  in  the  paper 
book  of  the  appellants,  did  any  question  arise  as  to  the  right 
of  a  creditor  to  enforce  the  equitable  obligation  of  every 
stockholder  in  a  moneyed  corporation  to  pay  the  whole 
amount,  if  necessary,  of  his  unpaid  capital  stock,  in  dis- 
charge of  all  the  indebtedness  of  the  corporation.  That  is 
a  species  of  obligation  which  is  founded  in  no  statute,  but 
exists  by  force  of  the  consideration  tliat  the  capital  stock  of 
a  corporation  is  a  trust  fund  for  the  payment  of  its  debts, 
and  upon  the  happening  of  the  insolvency  of  the  corporation, 
and  the  exhaustion  of  its  assets,  its  unpaid  capital  stock  may 


916  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

be  appropriated  for  the  benefit,  not  of  any  one  creditor,  but 
of  the  whole  body  of  creditors.  In  none  of  the  manufac- 
turing laws  of  this  Commonwealth  is  there  any  substitution 
of  any  form  of  equivalent  liability  for  this.  On  the  con- 
trary, the  special,  limited  and  restrained  forms  of  liability 
established  by  these  Acts,  are  in  the  nature  of  penal  obliga- 
tions for  derelictions  of  duty,  or  additional  personal  mone- 
tary duties  imposed  upon  stockholders  in  favor  of  laborers, 
mechanics  and  material  men,  out  of  consideration  for  the 
meritorious  character  of  the  claims.  They  are  an  added 
means  of  satisfaction  to  these  two  classes  of  creditors  under 
the  Act  of  1874,  but  substitutionary  for  nothing.  They  may 
be  resorted  to  or  they  may  not.  If  they  are  it  must  be  in  the 
precise  methods,  and  within  the  special  limits  imposed  by 
the  legislation  which  authorizes  them.  But  if  they  are  not, 
upon  what  principle  of  law  or  morals  shall  it  be  said  that 
these  two  meritorious  classes  of  creditors  shall  be  literally 
ousted  of  other  rights  and  remedies  available  to  all  creditors, 
simply  because  of  the  relation  of  creditor  to  the  common 
debtor. 

It  is  true  that  in  the  bill  in  this  case  the  complainants, 
other  than  Maxwell,  allege  that  the  debts  due  them  are  for 
work  and  labor  done,  and  materials  furnished ;  and  as  to 
Maxwell,  proof  was  offered,  and  refused,  to  show  that  the 
consideration  of  his  judgment  was  for  materials  furnished. 
But  of  what  consquence  is  this?  The  learned  counsel  for  the 
appellants  argue  with  much  ingeunity  and  earnestness,  that 
because  a  statutory  and  peculiar  remedy  is  given  to  creditors 
of  this  character,  that  one  remedy  alone  must  be  pursued, 
and  if  it  is  not,  all  their  other  remedies  against  the  same 
parties  are  taken  from  them.  In  other  words,  laborers  and 
material  men  can  make  the  stockholders  pay  them,  because 
they  are  stockholders,  and  by  the  statute  are  bound  to  pay 
such  claims  in  addition  to  paying  for  the  whole  of  their 
stock,  and  because  they  have  this  right  it  is  their  sole,  only 
right  of  redress  against  such  persons.  It  is  conceded  that  all 
other  creditors  can  require  the  stockholders  to  pay  in  their 


LANE'S  APPEAL  917 

unpaid  capital  stock  in  satisfaction  of  their  claims,  but  it 
is  contended  that  laborers  and  material  men  cannot  do  so, 
because  they  have  a  right  peculiar  to  themselves  to  resort  to 
an  additional  remedy  which  enables  them  to  call  upon  the 
stockholders,  although  they  may  have  paid  up  the  whole 
price  of  their  stock.  The  answer  to  this  is  very  siniple.  The 
laborers  and  material  men  are  creditors  of  the  corporation  in 
as  large  and  broad  a  sense  as  all  other  creditors,  and  of 
course  in  that  capacity  they  have  all  the  remedies  Avhich  are 
common  to  the  whole  mass.  In  addition  to  that,  they  have  a 
special  remedy  which  the  others  do  not  possess.  This  might 
be  availed  of  if  the  other  failed,  but.  in  no  possible  view 
of  the  case  can  we  hold  that  its  existence  depriA'es  them  of 
other  remedies  common  to  all  creditors  alike. 

The  doctrine  that  the  capital  stock  of  a  moneyed  cor- 
poration is  a  trust  fund  available  to  creditors  in  the  event  of 
insolvency  is  admitted  by  the  appellants,  and  is  established  by 
very  numerous  decisions.  A  few  of  them  are  the  fol- 
lowing: Sawyer  r.  Hoag,  ly  Wall.,  6io;  Sanger  z'.  Upton, 
I  Otto,  56;  Hatch  V.  Dana,  11  Id.,  205;  Wood  •z'.  Dummer, 
3  Mas.,  308;  Webster  v.  Upton,  i  Otto.  65  ;  Wilbur  v.  The 
Stockholders,  35  Leg.  Int.,  346;  Story's  Equity,  §  1252; 
Vose  z'.  Grant,  15  Mass..  505;  Spear  v.  Grant,  16  Mass.,  9; 
Stang's  Appeal,  10  W.  N.  C.,  409;  Messesmith  z'.  Bank,  15 
Norr.,  440.  In  Upton  z'.  Tribilcock,  i  Otto,  on  p.  47,  the 
doctrine  is  thus  'fully  and  forcibly  expressed :  "The  capital 
stock  of  a  moneyed  corporation  is  a  fund  for  the  payment 
of  its  debts.  It  is  a  trust  fund  of  which  the  directors  are 
the  trustees.  It  is  a  trust  to  be  managed  for  the  benefit  of 
its  shareholders  during  its  life,  and  for  the  benefit  of  its 
creditors  in  the  event  of  its  dissolution.  This  duty  is  a 
sacred  one  and  cannot  be  disregarded."  In  Sanger  z'.  Up- 
ton, I  Otto,  60,  it  is  said :  "The  capital  stock  of  an  incor- 
porated company  is  a  fund  set  apart  for  the  payment  of  its 

debts The  creditors  have  a  lien  on  it  in  equity.    It 

is  publicl}'  pledged  to  those  who  deal  with  the  corporation 
for  their  security.     Unpaid  stock  is  as  much  a  part  of  this 


918  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

pledge,  and  as  much  a  part  of  the  assets  of  the  company  as 
the  cash  which  has  been  paid  in  upon  it." 

It  is  also  entirely  clear  that  the  creditors  of  an  insolvent 
corporation  may  compel,  by  bill  in  equity,  the  payment  of 
the  unpaid  capital  stock  in  discharge  of  their  debts.  Thus  in 
Myers,  Assignee,  v.  Seeley,  lo  Nat.  Bankruptcy  Reg.  Rep., 
412,  it  was  said:  "Bills  by  creditors  who  have  judgments 
against  the  corporation  have  been  sustained  against  the  cor- 
poration and  its  stockholders,  said  bills  being  framed  in  the 
name  of  the  judgment  creditors,  and  of  all  others  who  may 
choose  to  come  in  and  be  made  parties  thereto.  In  such 
cases  the  decree  has  been  for  an  account  to  be  taken  of  the 
debts  and  assets  of  the  corporation,  for  the  appointment  of 
a  receiver  to  whom  the  stockholders  and  officers  are  ordered 
to  pay  and  account  respectively  for  so  much  of  the  assets 
and  capital  stock  as  are  necessary  to  pay  the  debts  due  to  the 
creditors ;  the  assets  thus  collected  and  received  to  be  applied 
by  the  receiver  in  discharge  of  the  debts."  There  are  other 
numerous  authorities  to  the  same  efifect,  but  it  is  unnecessary 
to  repeat  them,  as  the  right  to  such  a  remedy  is  not  at  all  dis- 
puted by  the  appellants,  if  any  right  of  recovery  exists.   *  *^ 

The  second  defence  alleged  relates  to  the  plaintiff,  John 
Maxwell,  who  was  the  holder  of  about  seven-eighths  of  all 
the  indebtedness  of  the  corporation.  Mr.  Maxwell  had  ob- 
tained a  judgment  for  his  debt,  and  it  was  argued  he  had  a 
complete  and  adequate  remedy  at  law  by  process  of  attach- 
ment in  execution. 

This  writ  is  simply  a  species  of  execution,  the  purpose 
of  which  is  to  obtain  satisfaction  of  the  judgment  upon 
which  it  is  founded.  It  is  not  an  original  proceeding  in- 
stituted to  enforce  a  real  or  supposed  legal  or  equitable  liabil- 
ity by  the  procurement  of  a  judicial  decree  as  its  result.  In 
other  words,  it  is  not  a  remedial  process,  and  can  scarcely 
be  spoken  of  as  a  remedy  in  the  sense  in  which  that  term  is 
used  in  considering  the  subject  of  an  adequate  legal  remedy 


"The    Court's    discussion   of   the    liability   of   an   assignee    of    an 
original  stockholder  is  omitted. 


LANE'S  APPEAL  919 

which  excludes  a  bill  in  equity.  But  leaving  that  thought 
aside,  we  cannot  concede  the  correctness  of  the  appellant's 
contention  in  this  regard. 

In  considering  this  subject  it  is  necessary  to  observe 
some  distinctions  which  must  be  borne  in  mind.  There  is 
no  doubt  that  a  contract  of  subscription  to  the  stock  of  a 
moneyed  corporation  imposes  upon  the  subscriber  an  obli- 
gation to  pay  to  the  corporation  the  amount  of  the  subscrip- 
tion, according  to  the  terms  of  the  contract.  If  he  fails  to 
pay,  the  corporation  may  sue  him  at  law  upon  his  contract 
and  recover  whatever  may  be  due.  But  recovery  in  this 
mode  must  be  in  accordance  with  the  terms  of  the  contract. 
If  by  those  terms  payment  was  to  be  made  in  any  particular 
manner,  or  only  of  a  certain  portion  of  the  par  value,  with 
an  agreement  that  no  more  was  to  be  paid,  such  contract 
is  valid  and  binding  upon  the  corporation.  But  if  the  cor- 
poration becomes  insolvent  and  all  its  other  assets  are  ex- 
hausted, and  it  is  requisite  for  the  payment  of  its  debts  that 
its  unpaid  capital  should  be  paid  up,  then  the  law  changes, 
and  it  is  perfectly  well  settled  by  many  decided  cases,  that 
all  stipulations,  conditions  and  devices  agreed  upon  between 
the  stockholders  and  the  corporation,  releasing  the  former 
from  their  obligation  to  pay  in  cash  the  full  par  value  of 
their  stock,  become  nugatory  and  void.  Notwithstanding 
such  terms  of  subscription  the  stockholders,  in  such  circum- 
stances, can  be  compelled  to  pay  in  full  f(jr  their  stock.  This 
doctrine  results  from  the  character  of  the  capital  stock  of 
corporations.  It  is  a  trust  fund.  It  exists  for  the  benefit  of 
the  creditors  whenever  their  rights  and  interests  require  it. 
Its  payment  can  be  enforced  in  modes  which  are  not  avail- 
able to  the  corporation  and  without  using  its  name.  Thus, 
creditors'  bills  in  the  names  of  individual  creditors,  whether 
by  judgment  or  otherwise,  proceedings  by  assignees  in  bank- 
ruptcy, either  directly  by  bill  or  by  petition  to  the  court  in 
bankruptcy,  and  proceedings  by  insolvent  assignees  or  re- 
ceivers under  direction  of  the  proper  courts,  are  the  ordinary 
modes  in  which  the  rights  of  the  creditors  are  enforced  in 


920  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

the  circumstances  we  are  now  considering.  In  all  of  them, 
however,  it  is  absolutely  essential  that  in  some  mode  there 
should  be  an  ascertainment  in  some  form  of  the  fact  of  in- 
solvency, of  the  exhaustion  of  all  other  assets,  of  the  amovmt 
of  the  debts  due  by  the  corporation,  of  the  amount  of  capital 
stock  required  for  the  discharge  of  the  debts,  and  a  call  or 
assessment  upon  the  stockholders  for  the  payment  of  the 
amount  necessary  to  be  paid  by  each.  If  the  contract  of 
subscription  is  absolute  and  without  conditions  or  terms  re- 
lieving the  stockholders  from  the  pa3anent  of  the  full  par 
value  of  the  stock,  the  call  or  assessment  may  be  made  by  the 
directors  of  the  corporation,  and  if  the  corporation  is  sui 
juris  and  has  not  passed  into  the  hands  of  assignees  or  re- 
ceivers, the  proceeding  to  recover  the  money  may  be  prose- 
cuted by  the  corporation  in  its  own  name.  If,  however,  the 
corporation  refuses  to  act,  or  is  disabled,  either  by  the  terms 
of  its  contract,  or  by  its  legal  incapacity  by  reason  of  in- 
solvency or  bankruptcy,  the  assessment  must  be  made  by 
some  court  having  jurisdiction  of  the  matter  and  the  parties, 
in  some  suitable  proceeding  by  way  of  bill  or  petition. 
Upon  such  proceeding  and  the  establishment  of  the  requisite 
facts  above  stated,  the  court  will  either  order  an  assessment 
to  be  made  upon  each  stockholder  of  the  amount  to  be  paid 
by  him,  and  upon  such  assessment  an  action  can  be  founded 
and  tried  in  the  common  law  courts,  or  a  decree  can  be  made 
directly  against  each  stockholder  who  has  been  made  a  party 
and  served  with  process,  for  the  payment  of  the  money  due 
by  him,  and  such  decree  can  be  enforced  by  immediate  exe- 
cution process. 

These  principles  are  announced  and  illustrated  in  many 
cases:  Wood  v.  Dummer,  3  Mason,  308,  314;  Sagory  v. 
Dubois,  3  Sandf.  Ch.  Rep.,  467;  Ward  v.  Griswoldville 
Manuf.  Co.,  16  Conn.,  593;  Ogilvie  v.  Knox  Ins.  Co.,  22 
How.,  380;  Mann  v.  Pentz,  3  Comst.,  415,  423;  Adler  v. 
The  Milwaukee  Patent  Brick  Manufacturing  Co.,  13  Wise, 
63;  Myers  z'.  Seeley,  10  Nat.  Bank.  Reg.  Rep.,  411 ;  Upton 
V.  Tribilcock,  i  Otto,  45,  47;  Sanger  v.  Upton,  Id.,  56,  60; 


LANE'S  APPEAL  921 

Webster  -v.  Upton,  Id.,  65;  Wilbur  v.  Stockholders,  39  Leg. 
Int.,  346;  Scovill  7'.  Thayer,  15  Otto,  143;  Patterson  v. 
Lynde,  16  Id.,  519;  Sawyer  v.  Hoag,  17  Wall.,  610. 

The  question  whether  an  attachment  in  execution  will 
lie  at  the  suit  of  a  single  creditor  to  secure  payment  of  his 
own  debt  to  the  exclusion  of  all  other  creditors  is  one  whose 
solution  depends  upon  the  application  of  some  of  the'prin- 
ciples  above  stated.  If  the  corporation  is  solvent,  and  the 
subscription  is  in  the  ordinary  form  of  an  absolute  engage- 
ment to  pay  the  price  of  the  stock,  there  is  no  doubt  that  an 
attachment  in  execution  is  an  effective  remedy  for  a  judg- 
ment creditor  of  the  corporation.  The  reason  is  that  in  such 
circumstances  the  amount  due  by  the  subscriber  to  the  stock 
is  an  ordinary  debt  due  directly  by  the  stockholder  to  the 
corporation,  the  payment  of  which  may  be  enforced  in  an 
action  on  the  contract  of  subscription.  Being  a  debt  due, 
there  is  a  right  of  action  for  its  recovery  by  the  company, 
and  therefore  it  is  strictly  and  properly  subject  to  seizure  by 
attachment.  Hence  it  was  held  in  Peterson  v.  Sinclair,  2 
Norr.,  250,  that  a  balance  due  on  a  subscription  to  stock  of 
a  corporation  is  attachable  as  other  debts  are.  No  cjuestion 
of  the  solvency  or  insolvency  of  the  corporation  was  raised 
or  considered  in  that  case. 

In  Hays  v.  Lycoming  Fire  Ins.  Co.,  2  Out.,  184,  an  at- 
tachment was  sustained  against  money  due  upon  an  assess- 
ment on  the  premium  notes  of  the  company  for  the  purpose 
of  paying  losses,  but  it  was  expressly  said  by  our  brother 
Gordon  in  the  opinion  that  it  was  admitted  the  company 
was  solvent,  and  the  case  was  not  complicated  by  the  ques- 
tion of  insolvency.  It  was  held  that  as  the  company  was 
solvent  and  the  premium  notes  were  assessable  for  the  pay- 
ment of  the  very  debt  in  suit,  and  the  assessment  was  law- 
fully made  and  the  money  partially  paid  into  the  hands  of 
one  of  the  garnishees,  it  was  to  be  treated  as  any  ordinary 
debt  and  subject  to  attachment  as  other  debts.  In  another 
case  between  the  same  parties,  reported  in  3  Out.,  621,  the 
facts  were  that  a  member  had  sustained  a  loss  by  fire,  for 


922  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

which  he  had  brought  an  action  and  obtained  judgment  be- 
fore the  insolvency  of  the  company.  An  attachment  in  exe- 
cution was  issued,  also  before  insolvency,  and  served  upon 
a  member  who  had  given  a  premium  note  for  his  insurance. 
He  became  indebted  upon  his  note,  before  insolvency,  for 
the  proportionate  part  necessary  to  pay  the  plaintiff's  loss, 
and  nothing  remained  to  be  done  except  to  ascertain  the 
amount  of  that  proportion.  Upon  these  distinct  grounds 
the  attachment  was  sustained.  Mr.  Justice  Trunkey  in  de- 
livering the  opinion  said,  on  p.  625.  "The  garnishee  gave  his 
notes  to  the  defendant,  to  be  paid  in  such  portions  and  at 
such  times  as  the  directors  may,  agreeably  to  the  Act  of 
incorporation,  require.  The  losses  by  fire  occurred,  and  this 
judgment  for  one  of  said  losses  was  obtained  prior  to  the 
proceedings  for  dissolution  of  the  company.  Before  its  dis- 
solution the  garnishee  became  indebted  on  his  premium  notes 
for  the  proportionate  sum  necessary  for  payment  of  said 
losses,  and  nothing  remained  to  be  done  except  to  ascertain 
the  proper  amount  of  his  indebtedness  prior  to  his  liability 
to  an  action  to  enforce  payment.  The  writ  of  attachment 
was  issued  and  served  before  the  dissolution  of  the  company, 
and  the  debt  owing  to  the  defendant  by  the  garnishee  became 
bound  by  it.  After  the  receiver  was  appointed  by  order  of 
the  Court,  he  ascertained  the  measure  or  amount  of  the  debt 
which  would  be  levied  upon  by  the  attachment  of  the 
plaintiff." 

The  foregoing  are  the  only  cases  of  attachment  in  exe- 
cution in  the  Pennsylvania  Courts  to  which  we  are  referred, 
and  with  the  exception  of  the  cause  In  re  Glen  Iron  Works, 
bankrupt,  13  W.  N.  C,  387,  to  be  hereafter  considered,  are 
all  we  have  found  in  the  books  of  reports  relating  to  this 
subject.  But  there  are  many  cases,  as  it  seems  to  us,  settle 
the  principles  which  ought  to  control  the  decision  of  the 
question. 

In  order  to  sustain  an  attachment  in  execution  there 
must  be  a  debt  due  from  the  garnishee  to  the  defendant  in 
the  judgment,  which  may  be  payable  at  the  time  of  the 


LANE'S  APPEAL  923 

service  of  the  writ,  or  may  become  payable  subsequently. 
This  debt  must  be  at  least  a  cause  of  action.  If  it  be  not, 
so  that  it  cannot  be  enforced  by  the  defendant  against  the 
garnishee,  it  certainly  cannot  be  converted  into  a  cause  of 
action  by  the  mere  consideration  that  an  attachment  has  is- 
sued instead  of  a  summons  in  a  common  law  action.  If 
there  is  an  inherent  defect  in  the  cause  of  action  itself  which 
prevents  any  recovery  by  the  defendant  or  his  representa- 
tives because  of  the  nature  of  the  defect,  it  is  not  possible 
that  such  defect  can  be  regarded  as  removed  simply  because 
another  proceeding  is  adopted. 

Now,  it  is  manifest,  upon  the  plainest  principles,  that 
in  the  case  of  an  insolvent  corporation,  all  of  whose  assets 
are  exhausted  except  its  unpaid  capital  stock,  there  can  be 
no  recovery  against  a  delinquent  stockholder  until  a  call  or 
assessment  has  been  made  upon  him  fixing  the  amount  he  is 
required  to  pay.  Prior  to  insolvency  this  might  be  done  by 
the  corporation  if  it  is  not  disabled  by  the  special  terms  of 
the  subscription  contract.  But  when  insolvency  and  exhaus- 
tion of  assets  exist,  the  unpaid  capital  is  not  available  to  any 
one  creditor  in  satisfaction  of  his  debt,  because  then  the 
whole  amount  of  the  unpaid  capital  is  a  trust  fund  which 
does  not  belong  to  the  coi-poration,  but  to  the  whole  body  of 
its  creditors.  Hence,  whether  the  proceeding  originates  in 
the  name  of  one,  or  of  several,  or  of  all  the  creditors,  the 
result  is  the  same  in  each.  The  capital,  when  recovered  en- 
ures to  the  benefit  of  all,  and  must  be  distributed  among  all 
ratably.  Before  any  recovery  can  be  had  in  such  proceed- 
ings, no  matter  of  what  particular  form,  there  must  be  an 
assessment  made  by  a  competent  authority.  The  necessity 
for  an  assessment  arises  from  the  consideration  that  only 
so  much  of  the  unpaid  capital  can  be  called  in  as  is  required 
for  the  payment  of  the  unsatisfied  debts.  If  the  whole  un- 
paid capital  is  not  required  the  whole  cannot  be  called.  In 
order  to  ascertain  how  much  is  required  there  must  be  an  ac- 
count of  debts,  assets,  and  unpaid  capital  taken,  and  then  a 
decree  for  an  assessment  of  tlie  amount  due  bv  eacli  stock- 


924  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

holder.  Tims  in  Alanii  v.  Pentz,  3  Comst.,  on  p.  423,  the 
Court  said:  "This  liability  (for  unpaid  capital)  is  only  in- 
curred when  the  capital  i)aid  in  is  not  sufficient  to  satisfy  the 
debts  against  the  corporation,  and  then  only  to  an  amount 
sufficient  to  satisfy  such  debts.  It  is  therefore  necessary  that 
an  account  of  the  assets  and  of  the  debts  should  be  taken,  of 
the  amount  of  capital  remaining  unpaid  upon  the  shares,  and 
the  amount  unpaid  by  each  stockholder,  in  order  that  they 
may  be  made  equally  liable." 

In  Myers  v.  Seek}',  10  Nat.  Bank,  Reg.  Rep.,  411,  the 
court  after  stating  the  rule  says:  "The  reason  of  that  rule 
is,  that  the  unpaid  subscriptions  are  assets  applicable  to  the 
payment  of  corporate  debts  which  the  corporate  authorities 
may  call  in  for  corporate  purposes.  If  there  are  adequate 
assets  other  than  said  calls,  then  the  creditor  has  no  legal  or 
equitable  right  to  insist  upon  such  calls.  Primarily  the 
amount  due  on  subscriptions  is  a  debt  due  to  the  corpora- 
tion which  it  alone  can  enforce,  and  unless  the  corporation 
is  without  other  assets  to  meet  its  obligations,  and  fails  to 
make  the  needed  calls,  creditors  cannot  interpose.  When 
the  facts  justify  their  interposition,  an  account  of  assets  and 
debts  should  be  taken,  in  order  that  it  may  be  known  what, 
if  any,  calls  should  be  made.  No  further  call  should  be  made 
than  what  is  sufficient,  together  with  the  other  assets,  to  meet 
all  debts;  for  the  bill  by  creditors  cannot  reach  beyond  the 
satisfaction  of  their  demands.     They  have  no  other  ecjuity." 

In  Wilbur  z:  The  Stockholders,  39  Leg.  Int.,  346,  Cad- 
WALADER,  J.,  said :  "Where  the  corporation  is  solvent,  the 
unpaid  capital  is  not  due  and  payable  by  the  stockholders 
until  payment  in  part  or  in  whole  is  called  for  by  the  cor- 
porate authorities,  unless  a  postponement  of  the  payment 
would  be  inconsistent  with  some  provision  of  the  Act  of  in- 
corporation, or  with  a  conventional  engagement  with  the 
stockholders.  Ordinarily  there  is  no  such  inconsistency  of 
either  kind,  and  thus  in  the  case  of  a  solvent  corporation,  a 
call  or  levy  by  the  corporate  authorities  assessing  the  amount 
or  amounts  payable  must  ordinaril}-  [)recede  any  ascertained 


LANE'S  APPEAL  92S 

obligation  of  the  respective  stockholders  to  pay.  But  in  the 
contrary  case  of  an  insolvent  corporation  the  recourse  of  its 
creditors  does  not  depend  upon  such  condition  precedent, 
and  cannot  be  thus  postponed.  Every  stockholder  is,  with 
relation  to  creditors,  under  an  obligation  to  pay  sr  much  of 
the  amount  represented  by  his  share,  or  shares,  of  the  capital 
as  may  be  required  for  the  payment  of  the  corporate  debt. 
.  .  .  Upon  the  insolvency  of  the  corporation  the  obliga- 
tions of  the  stockholders  thus  at  once  becomes  assets  for  the 
payment  of  its  debts  to  such  an  extent  as  other  assets  are 
deficient.  To  this  extent  the  obligation  of  every  stock- 
holder, in  its  just  proportion,  then  becomes  in  equity  a  debt 
payable  for  the  benefit  of  the  creditors.  No  act  of  the  cor- 
poration before  or  after  its  insolvency  can  derogate  in  this 
respect  from  the  rights  of  creditors."  In  Webster  v.  Up- 
ton, I  Otto.  71,  Strong^  J.,  says:  "All  the  cases  agree  that 
creditors  of  a  corporation  may  compel  payment  of  the  stock 
subscribed,  so  far  as  it  is  necessary  for  the  satisfaction  of  the 
debts  due  by  the  company.  This  results  from  the  fact  that 
the  whole  subscribed  capital  is  a  trust  fund  for  the  payment 
of  creditors  when  the  company  becomes  insolvent." 

The  foregoing  principles  which  are  expressed  in  many 
cases  indicate  the  fundamental  conditions  which  underlie 
the  whole  subject  of  the  liability  of  the  stockholders  as  to 
their  unpaid  capital  stock.  Such  stock  in  cases  of  insolvency 
is  due  as  an  entirety :  it  is  due  to  the  aggregate  of  the  credi- 
tors ;  only  so  much  is  due  as  is  requisite  to  discharge  the  in- 
debtedness of  the  corporation  after  all  other  assets  have  been 
thereto  applied ;  as  a  necessary  consequence  there  must  be  an 
account  of  debts,  assets  and  unpaid  capital  taken;  when  such 
account  has  been  taken,  and  the  amount  required  from  each 
stockholder  has  been  ascertained,  an  assessment  ordering 
the  payment  of  such  proportionate  amount  by  each  may  be 
made  by  a  court  of  competent  jurisdiction  in  a  proceeding  in 
which  the  corporation  and  the  stockholders  should  he  made 
defendants. 

I  consider  it  as  the  clear  result  of  the  decisions  that,  ex- 


92o  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

cept  in  cases  where  the  corporate  authorities  have  them- 
selves made  calls  which  are  authorized  by  the  subscription 
contracts,  there  is  absolutely  no  liability  of  any  kind  what- 
ever on  the  part  of  the  stockholder  to  pay  any  part  of  his 
unpaid  capital,  except  under  and  by  force  of  an  assessment 
made  as  above  stated.  If  this  be  true  there  is  nothing  upon 
which  an  attachment  can  fasten  at  any  time  prior  to  the  as- 
sessment. I  apprehend  this  conclusion  is  sustained  by  spe- 
cific authority  which  I  now  proceed  to  indicate : 

The  case  of  Chandler,  Receiver,  v.  Siddle,  a  stock- 
holder, lo  Nat.  Bank,  Reg.  Rep.,  236,  was  an  action  at  law 
by  a  receiver  of  an  insolvent  insurance  company  against  a 
single  stockholder,  to  collect  eighty  per  cent.,  unpaid,  of  the 
defendant's  subscription  to  the  capital  stock  of  the  com- 
pany. The  subscription  contract  provided  for  the  payment 
in  installments,  of  twenty  per  cent,  of  the  stock,  and  that 
the  balance  should  be  subject  to  the  call  of  the  directors  as 
they  may  be  instructed  by  a  majority  of  the  stockholders  rep- 
resented at  any  regular  meeting.  There  was  no  call  by  the 
directors,  and  the  Receiver  brought  an  action  at  law  on  the 
contract  to  recover  the  eighty  per  cent,  against  one  stock- 
holder defendant.  The  Circuit  Court  of  the  United  States 
for  the  Southern  District  of  Illinois,  Miller,  J.,  in  dispos- 
ing of  the  case,  said  on  p.  238:  "In  this  action  at  law,  in 
which  neither  the  corporation  nor  its  stockholders  other  than 
the  defendant  are  before  the  court,  and  in  which  the  suit  is 
on  the  contract  of  subscription  for  the  entire  eighty  per 
cent,  alleged  to  be  due,  I  am  of  opinion,  considering  the 
terms  of  that  contract,  and  that  no  call  or  assessment  is  al- 
leged, either  by  the  company  before  the  insolvency,  or  by 
the  court  since,  that  the  petition  does  not  state  a  cause  of 
action.  In  other  words,  in  this  action  at  law  on  the  contract 
there  must  he  a  call  or  assessment,  or  something  standing  in 
the  place  thereof  and  equivalent  thereto,  either  by  the  com- 
pany, or  by  a  proper  court  in  order  to  make  the  defendant 
liable." 

If  there  was  not  a  cause  of  action,  nothing  to  make  the 


LANE'S  APPEAL  927 

defendant  liable  without  an  assessment,  surely  there  could  be 
nothing  to  serve  as  the  foundation  of  an  attachment.  For 
the  writ  of  attachment  cannot  create  a  liabilit}-.  It  can  at 
best  appropriate  a  liability  already  existing.  But  if  it  already- 
existed  it  could  be  enforced  in  the  proceeding  on  the  con- 
tract. The  attachment  is  also  on  the  contract  alone  where 
there  has  been  no  assessment,  and  must  fall  with  the  action 
at  law  built  upon  the  same  foundation.  *  *  *" 
Decree  affirmed.^ 


'  The  Court's  further  discussion  of  cases  ilhistrating  its  position  is 
omitted. 

*For  cases  in  relation  to  the  right  of  a  judgment  creditor  of  a 
corporation  to  resort  to  the  process  of  garnishment  to  obtain  satis- 
faction of  his  debts  out  of  what  is  due  by  the  stockholder  to  the 
corporation  on  account  of  his  debt,  see  Thompson  on  Corporations, 
Edition  of  1910,  sec.  5843,  notes ;  also  Amer.  Dig.  tit.  Corporations. 
Key  No.  255.  The  remedy  by  process  of  garnishment  has  been  extended 
by  statute.  Thus  in  Alabama,  section  2182,  code  of  1896,  provides 
that  any  judgment  creditor  of  a  corporation,  having  an  execution 
returned  no  property  found,  may  by  garnishment,  subject  the  unpaid 
subscription  of  an}'  stockholder  to  the  payment  of  his  debts  "without 
regard  to  whether  the  corporation  can  maintain  suit  against  the  stock- 
holder for  each  subscription  or  not."  See  Eiislen  v.  Nathan,  136  Ala. 
412,  1902. 

See,  0)1  the  subject  of  creditors'  bills  generally,  Thompson  on  Cor- 
porations, Edition  1910,  sec.  5083  and  cases  cited;  also  Amer.  Dig.  tit. 
Corporations  Kej'  No.  259   (8). 

On  the  rights  of  creditors  to  have  receivers  appointed  see  Thomp- 
son on  Corporations,  Edition  1910,  sec.  6351,  and  cases  cited ;  also 
Amer.    Dig.   tit.    Corporations,    Key   No.    556. 

Compare  ii>ith  our  principal  case,  Hatch  v.  Dana.  loi  U.  S.  205, 
1879.  (Strong,  J.  :  "This  bill  is  an  ordinary  creditors'  bill,  the  sole 
object  of  which  is  to  obtain  payment  of  the  complainant's  judgment.  It 
is  true  it  is  brought  on  behalf  of  the  complainant  and  all  other  creditors 
of  the  corporation  who  might  choose  to  come  in  and  seek  relief  by  it, 
contributing  to  the  expense  of  the  suit.  But  no  other  creditors  came  in ; 
and  it  does  not  appear  that  there  is  any  other  creditor,  unless  it  be  one 
of  the  stockholders,  who  was  made  a  defendant,  and  who  hied  a  cross- 
bill which  he  afterwards  dismissed.  All  the  stockholders  were  not 
made  defendants. 

"The  bill  was  not  a  bill  seeking  to  wind  up  the  company.  It  sought 
simply  payment  of  a  debt  out  of  the  unpaid  stock  subscriptions. 

"That  unpaid  stock  subscriptions  are  to  be  regarded  as  a  fund, 
which  the  corporation  holds  for  the  payment  of  its  debts,  is  an  un- 
deniable proposition.  But  the  appellants  insist  that  a  creditor  of  an 
insolvent  corporation  is  not  at  liberty  to  proceed  against  one  or  more 
delinquent  subscribers  to  recover  the  amount  of  his  debt,  without  an 
account  being  taken  of  other  indebtedness,  and  without  bringing  in 
all  the  stockholders  for  contribution.  They  insist,  also,  that  by  the 
terms  of  the  subscriptions  for  stock  made  by  these  appellants  they  were 
to  pay  for  the  shares  set  opposite  their  names  respectively,  'as 
called  for  by  the  said  company ;'  that  the  company  made  no  calls  for 
more   than   thirty  per   cent. ;   that,   therefore,   this   company   could  not 


928  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

recover  the  seventy  per  cent,  unpaid  without  making  a  previous  call ; 
and  that  a  court  of  equity  will  not  enforce  the  contract  differently  from 
what  was  contemplated  in  the  subscription. 

"These  positions,  we  think,  are  not  supported  by  the  authorities, — 
certainly  not  by  the  more  modern  ones, — nor  are  they  in  harmony  with 
sound  reason,  when  considered  with  reference  to  the  facts  of  this  case. 
The  liability  of  a  subscriber  for  the  capital  stock  of  a  company  is 
several,  and  not  joint.  By  his  subscription  each  becomes  a  several 
debtor  to  the  company,  as  much  so  as  if  he  had  given  his  promissory 
note  for  the  amount  of  his  subscription.  At  law,  certainly,  his  sub- 
scription may  be  enforced  against  him  without  joinder  of  other  sub- 
scribers ;  and  in  equity  his  liability  does  not  cease  to  be  several.  A 
creditor's  bill  merely  subrogates  the  creditor  to  the  place  of  the  debtor, 
and  garnishes  the  debt  due  to  the  indebted  corporation.  It  does  not 
change  the  character  of  the  debt  attached  or  garnished.  It  may  be 
that  if  the  object  of  the  bill  is  to  wind  up  the  affairs  of  this  corpora- 
tion, all  the  shareholders,  at  least  so  far  as  they  can  be  ascertained, 
should  be  made  parties,  that  complete  justice  may  be  done  by  equalizing 
the  burdens,  and  in  order  to  prevent  a  multiplicity  of  suits.  But  this 
is  no  such  case.  The  most  that  can  be  said  is  that  the  presence  of  all 
the  stockholders  might  be  convenient,  not  that  it  is  necessary.  When 
the  only  object  of  a  bill  is  to  obtain  payment  of  a  judgment  against  a 
corporation  out  of  its  credits  or  intangible  property,  that  is,  out  of  its 
unpaid  stock,  there  is  not  the  same  reason  for  requiring  all  the  stock- 
holders to  be  made  defendants.  In  such  a  case  no  stockholder  can  be 
compelled  to  pay  more  than  he  owes.") 

Pofts  V.  Wallace,  146  U.  S.  689,  1892.  (The  A  Co.  made  an  assign- 
ment to  B  for  the  benefit  of  creditors.  B  brought  an  action  against 
one  William  H.  Wallace,  a  stockholder,  for  the  full  amount  of  his 
subscription,  no  part  of  which  had  been  paid.  Shiras,  J.,  in  the  course 
of  his  opinion  said:  "Another  ground  of  defence  urged  was  that 
the  plaintiff  had  mistaken  his  remedy;  that  the  proceeding  to  enforce 
the  liability  of  Wallace  should  have  been  by  a  bill  in  equity. 

"We  might  dismiss  this  position  by  the  observation  that  it  does 
not  appear  to  have  been  taken  by  the  defendant  in  his  answer,  or  to 
have  been  brought  to  the  attention  of  the  court  at  the  trial. 

"As,  however,  for  other  reasons,  the  case  has  to  go  back  for 
another  trial,  it  may  be  well  for  us  to  briefly  consider  the  merits  of 
the  suggestion. 

"It  is  undoubtedly  true  that,  in  Pennsylvania,  in  the  case  of  an 
insolvent  corporation,  its  assets,  including  unpaid  capital  stock,  con- 
stitute a  trust  fund,  and  that  such  fund  cannot  be  appropriated  by  indi- 
vidual creditors,  by  means  of  attachments  or  executions  directed  against 
particular  assets,  but  should  be  distributed,  on  equitable  principles, 
among  the  creditors  at  large. 

"Accordingly,  it  was  ruled  by  the  Supreme  Court  of  Pennsylvania 
in  Lane's  Appeal,  105  Penn.  St.  49.  and  in  Bell's  Appeal,  105  Penn. 
St.  88,  cases  cited  by  defendant's  counsel,  that  a  bill  in  equity  is  a 
proper  remedy  whereby  to  subject  the  property  of  an  insolvent  cor- 
poration to  the  claims  of  its  creditors. 

"Some  general  expressions  were  used  in  those  opinions,  cited  in 
the  brief  of  defendant's  counsel,  which  seem  to  countenance  the  propo- 
sition that  the  only  remedy  in  each  case  is  by  a  bill  in  equity.  But  an 
examination  of  the  facts  of  the  cases  and  of  the  reasoning  of  the 
opinions  clearly  shows  that  what  the  court  meant  was  that  the  pro- 
ceeding must,  in  some  form,  be  a  remedy  for  all,  and  not  for  some, 
of  the  creditors — that  the  remedy  must  be  coextensive  with  the  nature 
of  the  property  as  a  trust  fund. 

"That  this  is  the  proper  reading  of  those  cases  is  shown  by  the 
later  case  of  Citizens'  Savings  Bank  v.  Gillespie,  115  Penn.  St.  564,  572. 
That  was  the  case  of  a  suit  brought  by  an  assignee  of  an  insolvent  bank 


LANE'S  APPEAL  929 

for  the  benefit  of  creditors  against  a  subscriber  for  stock  remaining 
unpaid,  and  the  Supreme  Court,  per  Paxson,  C.  J.,  said  : 

"'There  being  no  assessment  in  evidence,  the  learned  judge  left 
it  to  the  jury  to  find  w'hether  the  whole  of  the  unpaid  subscription  was 
required  to  pay  the  debts  of  the  company.  We  see  no  error  in  this. 
If  the  unpaid  subscriptions  were  required  to  pay  the  creditors,  no 
assessment  was  necessary,  under  the  authorit}^  of  Yeager  v.  Scranton 
Trust  Company,  (14  Weekly  Xotes  of  Cases,  296.)  *  *  *  j^-  ^y^s 
there  said  that  "the  uncontradicted  evidence  shows  that  it  was  neces- 
sary to  collect  the  whole  of  this  stock  subscription  in  order  to  pay  the 
sums  due  the  depositors  of  this  insolvent  corporation."  There  Js  not 
even  an  apparent  conflict  between  the  case  referred  to  and  the  later 
cases  of  Lane's  Appeal.  105  Penn.  St.  49,  and  Bell's  Appeal,  115  Penn. 
St.  88,  564.  Those  w-erc  creditors'  bills,  filed  against  insolvent  corpora- 
tions, to  compel  the  payment  by  the  stockholders  of  their  unpaid  sub- 
scriptions, and  it  was  held  that,  in  such  cases,  there  must  be  an  account 
taken  of  the  amount  of  debts,  assets  and  unpaid  capital,  and  a  decree 
for  an  assessment  of  the  amount  due  by  each  stockholder.  The  reason 
of  this  is  plain.  (Upon  the  insolvency  of  a  corporation  a  stockholder 
is  liable  for  onh-  so  much  of  his  unpaid  subscription  as  may  be  re- 
quired to  pay  the  creditors.  Hence,  he  may  not  be  called  upon  in  an 
arbitrary  way  to  pay  any  sum  that  an  assignee  or  creditor  may  de- 
mand. It  is,  therefore,  requisite  to  ascertain,  in  an  orderly  manner, 
the  extent  of  the  stockholders'  liability  before  proceedings  are  com- 
menced to  enforce  it.  But  the  necessity  for  this  does  not  exist  when 
the  whole  amount  is  required  to  pa\-  the  debts.  Hence,  /;/  such  cases. 
as  was  said  in  Yeager  v.  Scranton  Bank,  supra,  an  assessment  is  not 
essential.     The  assignee  may  sue  at  once,  for  all  is  required.' 

"At  the  trial  in  the  present  case  (see  page  27  of  the  record),  the 
counsel  for  the  defendant  consented  to  take  the  statement  of  the  com- 
pany's clerk,  w'ithout  contradicting  it,  that  the  assets  of  the  company 
appeared  to  be  $250,000  and  the  liabilities  $270,000  to  $275,000.  It  was 
not  necessary,  therefore,  to  have  a  preliminary  assessment  against  Wal- 
lace, as  the  jury  could  have  found,  under  the  concession  of  his  counsel, 
that  the  entire  amount  of  his  unpaid  stock  was  necessary  to  meet  the 
indebtedness  of  the  corporation,  ^^'e  understand  the  concession  to 
mean  that  the  debts  exceeded  the  assets,  including. the  unpaid  subscrip- 
tions of  the  defendant  and  the  other  stockholders.  If  we  are  wrong 
in  this,  the  defendant  can  show  the  facts,  and  invoke,  if  he  be  so 
advised,  the  doctrine  of  The  Savings  Bank  v.  Gillespie,  if,  indeed,  that 
doctrine  will  avail  him"). 

A  bill  in  equity  would  appear  to  be  the  only  practical  proceeding 
where  the  creditor  is  himself  a  stockholder,  if  the  substantive  rights 
recognized  in  the  following  case  are  to  be  wtorked  out : 

Blood  V.  La  Serena  Land  and  Jl'ater  Co..  150  Cal.  764,  1907.  (A 
was  a  creditor  of  a  Company  and  also  a  stockholder.  The  amount  due 
by  A  on  his  stock  exceeded  the  indebtedness  of  the  Company  to  him. 
A  obtained  a  judgment  against  the  Company  for  the  amount  due  him. 
and  then  proceeded  against  the  v^ompany  and  his  fellow  stockholders 
to  recover  from  the  latter  their  unpaid  subscriptions  and  apply  the  same 
in  satisfaction  of  his  judgment.  Sloss,  J.:  "The  just  and  equitable 
rule  appears  to  us  to  be  that  declared  in  Bissit  v.  Kentucky  River  Xar'i- 
gation  Co..  15  Fed.  35.3.  and  IVilson  v.  Kiesel,  9  Utah,  397,  [35  Pac.  488] 
— i.  e..  that  in  such  case  the  plaintiff  stockholder  must  contribute  rat- 
ably with  the  defendant  stockholders  toward  the  liquidation  of  his 
demand  against  the  corporation.  This  was  the  principle  applied  bv  the 
trial  court  as  enunciated  in  the  conclusion  of  law  above  nuoted.  L^nde*- 
it  the  court  ascertained  the  total  amount  of  the  plaintiff's  claim,  and 
apportioned  the  payment  of  that  claim  among  the  plaintiff  and  the  de- 
fendants in  proportion  to  the  amounts  respectively  due  from  them  for 
unpaid  subscriptions.") 


930  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 


COIT  v.  GOLD  AMALGAMATING  COMPANY. 
In  the  Supreme  Court  of  the  United  States,  1886. 

119  United  States  Reports,  343. 

This  was  a  bill  in  equity  against  a  corporation  and  its 
stockholders  to  enforce  a  debt  due  from  the  former  against 
the  latter.     The  case  is  stated  in  the  opinion  of  the  court. ^ 

Mr.  Justice  Field:  The  defendant,  the  North  Caro- 
lina Gold  Amalgamating  Company,  was  incorporated  under 
the  laws  of  North  Carolina,  on  the  30th  of  January,  1874, 
for  the  purpose,  among  other  things,  of  working,  milling, 
smelting,  reducing  and  assaying  ores  and  metals,  with  the 
power  to  purchase  such  property,  real  and  personal,  as  might 
be  necessary  in  its  business,  and  to  mortgage  or  sell  the 
same. 

The  plaintiff  is  the  holder  of  a  judgment  against  the 
company  for  $5489,  recovered  in  the  Court  of  Common 
Pleas  of  Philadelphia,  on  the  i8th  of  May.  1879,  upon  its 
two  drafts,  one  dated  June  ist,  1874,  and  the  other  August 
15th,  1874,  each  payable  four  months  after  its  date.  Unable 
to  obtain  satisfaction  of  this  judgment  upon  execution,  and 
finding  that  the  company  was  insolvent,  the  plaintiflf  brought 
this  suit  to  compel  the  stockholders  to  pay  what  he  claims  to 
be  due  and  unpaid  on  the  shares  of  the  capital  stock  held 
by  them,  alleging  that  he  had  frequently  applied  to  the 
ofificers  of  the  company  to  institute  a  suit  for  that  purpose, 
but  that  under  various  pretences  they  refused  to  take  any 
action  in  the  premises. 

By  its  charter  the  minimum  capital  stock  was  fixed  at 
$100,000  divided  into  1000  shares  of  $100  each,  with  power 
to  increase  it  from  time  to  time,  by  a  majority  vote  of  the 
stockholders,  to  two  million  and  a  half  of  dollars.  The  char- 
ter provided  that  the  subscription  to  the  capital  stock  might 


*  The  Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


COIT  V.  GOLD  AMALGAMATING  COMPANY  931 

be  paid  "in  such  instalments,  in  such  manner  and  in  such 
property,  real  and  personal,"  as  a  majority  of  the  corpora- 
tors might  determine,  and  that  the  stockholders  should  not 
be  liable  for  any  loss,  or  damages,  or  be  responsible  beyond 
the  assets  of  the  company. 

Previously  to  the  charter,  the  corporators  had  been  en- 
gaged in  mining  operations,  conducting  their  business  under 
the  name  and  title  which  they  took  as  a  corporation.  Upon 
obtaining  the  charter,  the  capital  stock  was  paid  by  the  prop- 
erty of  the  former  association,  which  was  estimated  to  be 
of  the  value  of  $100,000,  the  shares  being  divided  among 
the  stockholders  in  proportion  to  their  respective  interests  in 
the  property.  Each  stockholder  placed  his  estimate  upon 
the  property;  and  the  average  estimate  amounted  to 
$137,500.  This  sum  they  reduced  to  $100,000,  inasmuch  as 
the  capital  stock  was  to  be  of  that  amount. 

The  plaintiff  contends,  and  it  is  the  principal  basis  of 
his  suit,  that  the  valuation  thus  put  upon  the  property  was 
illegally  and  fraudulently  made  at  an  amount  far  above  its 
actual  value,  averring  that  the  property  consisted  only  of  a 
machine  for  crushing  ores,  the  right  to  use  a  patent  called 
the  Crosby  process,  and  the  charter  of  the  proposed  organi- 
zation ;  that  the  articles  had  no  market  or  actual  value,  and, 
therefore,  that  the  capital  stock  issued  thereon  was  not  fully 
paid,  or  paid  to  any  substantial  extent,  and  that  the  holders 
thereof  were  still  liable  to  the  corporation  and  its  creditors 
for  the  unpaid  subscription. 

If  it  were  proved  that  actual  fraud  was  committed  in 
the  payment  of  the  stock,  and  that  the  complainant  had 
given  credit  to  the  company  from  a  belief  that  its  stock  was 
fully  paid,  there  would  undoubtedlv  be  substantial  ground 
for  the  relief  asked.  But  where  the  charter  authorizes  capital 
stock  to  be  paid  in  property,  and  the  shareholders  honestly 
and  in  good  faith  put  in  property  instead  of  money  in  pay- 
ment of  their  subscriptions,  third  parties  have  no  ground  of 
complaint.  The  case  is  very  different  from  that  in  which 
subscriptions  to  stock  are  payable  in  cash,  and  where  only 


932  LIABILITY  OF  ORIGINAT.  SHAREHOLDERS 

a  part  of  the  instalments  has  been  paid.  In  that  case  there 
is  still  a  debt  due  to  the  corporation,  which,  if  it  becomes 
insolvent,  may  be  sequestered  in  equity  by  the  creditors,  as  a 
trust  fund  liable  to  the  payment  of  their  debts.  But  where 
full  paid  stock  is  issued  for  property  received,  there  must 
be  actual  fraud  in  the  transaction  to  enable  creditors  of  the 
corporation  to  call  the  stockholders  to  account.  A  gross 
and  obvious  overvaluation  of  property  would  be  strong 
evidence  of  fraud.  Boynton  v.  Hatch,  47  N.  Y.  225  ;  Van 
Cott  V.  Van  Brunt,  82  N.  Y.  535  ;  Carr  v.  Le  Fevrc,  27 
Penn.  St.  413. 

But  the  allegation  of  intentional  and  fraudulent  under- 
valuation of  the  property  is  not  sustained  by  the  evidence. 
The  patent  and  the  machinery  had  been  used  by  the  corpora- 
tors in  their  business,  which  was  continued  under  the  charter. 
They  were  immediately  serviceable,  and  therefore  had  to 
the  company  a  present  value.  The  corporators  may  have 
placed  too  high  an  estimate  upon  the  property,  but  the  court 
below  finds  that  its  valuation  was  honestly  and  fairly  made ; 
and  there  is  only  one  item,  the  value  of  the  chartered  privi- 
leges, which  is  at  all  liable  to  any  legal  objection.  But  if 
that  were  deducted,  the  remaining  amount  would  be  so  near 
to  the  aggregate  capital,  that  no  implication  could  be  raised 
against  the  entire  good  faith  of  the  parties  in  the  trans- 
action.^ 

Judgment  affirmed.^ 


'The  remainder  of  the  opinion,  relating  to  alleged  liability  on  stock 
issued  after  the  plaintiff  had  extended  credit  is  omitted. 

*  For  cases  in  accord,  see  Thompson  on  Corporations,  Edition  of 
rgio,   §4937,   note   24;   also   Amer.    Dig.,    tit.     Corporations,    Key    No. 

232  (3)- 

Compare  with  our  principal  case. 

Dieterle  v.  Ann  Arbor  Paint  and  Enamel  Co..  143  Mich.  416,  1906. 
(The  A  Co.  was  insolvent.  Alembers  of  the  A  Co.  paid  for  their  sub- 
scriptions to  the  shares  of  the  B  Co.  in  stock  of  the  A  Co.  Held,  that 
such  payment  was  no  defense  by  stockholders  of  the  B  Co.  sued  by  a 
creditor' of  the  B  Co    to  enforce  their  liability  as  subscribers.) 

Hobgood  v.  Ehlen,  141  N.  C.  344,  1906.  (A  statute  of  Delaware 
provides  :  "Any  corporation  existing  under  any  law  of  this  State  may 
issue  stock  for  labor  done  or  personal  property  or  real  estate  or  leases 
thereof:  in  the  absence  of  fraud  in  the  transaction,  the  judgment  of  the 
directors  as  to  the  value  of  such  labor,  property,  real  estate  or  leases 


COIT  V.  GOLD  AMALGAMATING  COMPANY  933 

shall  be  conclusive."  The  value  of  the  property  in  the  business  of  A 
and  B  was  $896.63.  A,  B,  and  C  organized  a  Company  under  the  laws 
of  Delaware  with  a  capital  of  $100,000;  the  directors  valued  the  prop- 
erty of  A  and  B,  at  $100,000;  took  over  the  business  of  A  and  B  and 
issued  the  entire  capital  stock  therefore.  Held,  that  the  jury  were 
justified  in  drawing  the  conclusion  that  there  was  actual  fraud  on  the 
part  of  the  directors.) 

Lester  v.  Bemis  Lumber  Co.,  71  Ark.  379,  1903.  (A  statute  per- 
mitted subscription  to  stock  to  be  paid  in  property.  A  paid  for  his 
subscription  in  the  B  Co.  by  stock  in  the  C  Co.  Held,  that  as  one 
compan}'  in  the  State  could  not  hold  stock  in  another  compan}i,  there 
was  no  payment  for  the  stock,  although  had  the  B  Co.  realized  any- 
thing on  the  stock  A  could  be  credited  with  the  amount  realized,  and 
that  A  was  liable  to  a  creditor  of  the  Company  for  the  full  value  of 
the  stock.) 

See  V.  Heppenheimer,  69  N.  J.  Eq.  36,  1905.  (A  statute  of  New 
Jersey  authorized  stock  of  corporations  to  be  issued  for  property. 
B  et  al.,  each  owned  separately  straw  paper  mills,  the  total  value  of 
which  was  about  $2,200,000.  A  and  B,  et  al.,  entered  into  a  transaction, 
the  final  result  of  which  was  that  a  Company  was  formed,  the  mills 
were  acquired  by  the  Company,  the  property  mortgaged  by  the  Com- 
pany for  $1,000,000,  and  $5,000,000  of  stock  issued  against  the  property. 
The  stock  and  bonds  were  distributed  between  A  and  B,  et  al..  the  idea 
of  the  promoters  being  than  in  estimating  the  value  of  the  mill  proper- 
ties, as  the  new  corporation  was  going  to  run  these  properties,  the  value 
of  the  good  will  of  the  different  businesses,  and  the  prospective  profits 
of  the  new'  Company  due  to  the  savings  to  be  effected  and  the  monopoly 
acquired  by  running  the  different  mills  as  one  business,  could  be  valued 
as  property  against  which,  under  the  statute,  stock  could  be  issued.  The 
Court  refused  to  regard  either  as  property,  and  held,  that  the  stock 
had  been  issued  at  an  inflated  value,  and  that  the  creditors  of  the 
Company  could  force  the  holders  to  pay  the  difference.") 


934  LIABILITY  OL   ORIGINAL  SHAREHOLDERS 


WINSTON  V.  THE  DORSETT  PIPE  &  PAVING  CO. 
In  the  Supreme  Court  of  Illinois^  1889. 

129   Illinois   Reports,   64/ 

t 

Mr.  Justice  Magruder:  This  is  a  bill  filed  by  the  ap- 
I^ellant,  F.  H.  Winston,  as  a  stockholder  in  the  Dorsett  Pipe 
and  Paving  Company,  a  corporation  organized  under  the 
laws  of  this  State,  against  said  company,  and  its  creditors, 
and  the  other  stockholders,  all  of  whom  are  parties  defendant 
to  this  proceeding.  The  bill  seeks  the  dissolution  of  the 
corporation,  the  appointment  of  a  receiver,  the  sale  of  the 
corporate  assets,  the  assessment  of  the  shareholders,  and  the 
payment  of  the  creditors. 

The  company  was  organized  in  188 1  with  an  authorized 
capital  of  $125,000.00,  divided  into  shares  of  $100.00  each. 
Among  the  original  subscribers  to  the  stock,  who  participated 
in  the  organization,  were  the  following  persons,  whose  sub- 
scriptions were  as  follows :  F.  H.  Winston,  50  shares, 
$5000.00;  Joseph  Stockton.  100  shares,  $10,000.00;  M.  S. 
Chase,  100  shares,  $10,000.00;  I.  S.  Waterman,  100  shares, 
$10,000.00;  I.  S.  Waterman,  trustee,  637  shares,  $63,700.00. 
W^aterman  died  before  the  filing  of  the  bill,  and  his  executors 
were  defendants  in  the  court  below.  The  only  appellants  in 
this  case  are  F.  H.  Winston,  the  complainant,  and  Stockton 
and  Chase,  two  of  the  defendants.  The  appellees,  who  are 
chiefly  interested  in  the  controversy,  are  the  executors  of 
AA'aterman's  estate.  None  of  the  creditors,  and  none  of  the 
stockholders,  except  the  three  appellants,  complain  of  the 
decree  of  the  Circuit  Court. 

The  decree  assesses  the  whole  amount  of  indebtedness, 
found  to  be  due.  against  all  the  stock,  subject  to  assessment, 
except  that  known  as  the  "Waterman  trustee  stock." 
amounting  originally  to  637  shares.     It  is  only  this  feature 


'  The   Reporter's  notes  of  the  arguments  of  counsel  are  omitted. 


WINSTON  V.  THE  DORSETT  PIPE  &  PAVING  CO.      935 

of  the  decree  which  the  appellants  complain  of.  They  claim 
that  the  trustee  stock  should  have  been  made  to  bear  its  pro 
rata  share  of  the  indebtedness,  and  that,  by  the  failure  of  the 
court  below  to  assess  it,  along  with  the  rest  of  the  stock, 
they  are  compelled  to  contribute  more  than  their  fair  pro- 
portions towards  the  discharge  of  the  debts  of  the  com- 
pany. 

The  original  subscribers  to  the  stock,  besides  those  al- 
ready named,  were  D.  H.  Dorsett,  250  shares,  $25,000.00; 
I.  P.  Ellacott,  10  shares,  $1000.00;  F.  S.  Winston,  Jr.,  3 
shares,  $300.00.  After  613  of  the  1250  shares  had  been 
subscribed  for,  there  was  nobody  to  take  the  remaining  637 
shares.  It  was  deemed  advisable  to  organize  the  corporation 
at  once,  and  to  proceed  with  the  business  as  soon  as  possible. 
Under  the  statute  a  certificate  of  organization  could  not  be 
obtained  from  the  Secretary  of  State,  until  the  capital  stock 
should  be  fully  subscribed.  Accordingly  it  was  suggested, 
at  the  gathering  of  the  original  subscribers  above  named, 
and  while  they  were  engaged  in  signing  their  names  to  the 
subscription  paper,  that  Waterman,  who  was  the  prime 
mover  and  chief  promoter  of  the  scheme,  should  subscribe 
for  the  637  shares,  as  trustee.  In  pursuance  of  this  sug- 
gestion he  signed  the  list:  "I.  S.  Waterman,  trustee,  637 
shares,  $63,700."  The  caption  of  the  paper,  so  signed  by 
him  and  the  others,  is  as  follows :  "We,  the  undersigned, 
hereby  severally  subscribe,  for  the  number  of  shares  set  op- 
posite our  respective  names,  to  the  capital  stock  of  the  Dor- 
sett  Pipe  and  Paving  Company,  and  we  severally  agree  to 
pay  the  said  company  for  each  share  the  sum  of  one  hundred 
dollars." 

There  is  some  uncertainty  expressed  by  some  of  the  wit- 
nesses as  to  the  persons,  for  whom  Wateniian  was  acting  as 
trustee  when  he  so  signed  his  name.  We  deem  it  unneces- 
sary to  consider  whether  he  was  technically  a  trustee  for  the 
corporation,  or  for  the  stockholders,  or  for  the  future  distrib- 
utees of  the  stock.  After  a  careful  examination  of  all  the 
evidence  we  are  satisfied,  that  there  was  a  definite  under- 
standing between  him  and  the  other  subscribers,  as  to  the 


936         LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

purpose  for  which  he  took  the  stock,  and  as  to  the  nature  of 
the  Habihty,  which  he  assumed  thereby.  It  was  understood, 
that,  after  the  report  should  be  made  to  the  Secretary  of 
State,  and  the  complete  organization  of  the  corporation 
should  be  effected,  Waterman  should  go  to  work  to  dispose 
of  the  stock  to  third  parties,  and  that  the  other  stockholders 
should  help  him  to  so  dispose  of  it.  As  between  him  and  his 
co-stockholders,  he  was  not  to  be  liable  upon  the  stock,  and 
was  not  to  be  required  to  pay  assessments  upon  it.  It  was 
explained  to  him  and  he  was  fully  aware,  that,  as  between 
him  and  creditors  of  the  company,  he  would  be  held  liable 
upon  his  subscription  for  the  637  shares.    *    *  *  *2 

As  between  the  creditors  of  the  company  and  Water- 
man, he  must  be  regarded  as  a  subscriber  for  the  637  shares. 
The  fact  that  he  placed  the  word,  "trustee"  after  his  name 
would  make  no  difference  in  his  liability  to  the  creditors. 
"Where  shares  are  held  by  a  person  as  trustee  for  another,  the 
legal  holder  of  the  shares,  and  not  the  equitable  owner,  is 
primarily  liable  both  to  the  company  and  to  its  creditors." 
(2  Morawetz  on  Corp.  sec.  853.)  Appellees  admit  that  the 
estate  of  Waterman  is  liable  to  be  assessed  upon  the  shares 
held  by  him  as  trustee,  if  such  assessment  becomes  necessary 
in  order  to  pay  the  debts  of  the  corporation.  The  rights  of 
the  creditors  in  this  regard  are  recognized  by  the  decree  of 
the  trial  court. 

But,  in  view  of  the  understanding  among  the  stock- 
holders that  the  trustee  stock  should  not  be  subject  to  assess- 
ment as  between  Waterman  and  the  original  subscribers,  the 
Circuit  Court,  by  its  decree,  makes  an  assessment  against  the 
stock,  other  than  the  trustee  stock,  reserving  the  right  to 
make  further  assessments  if  the  same  shall  be  needed.  The 
decree  provides  that  "in  case  money  enough  cannot  be 
realized  from  the  assessments  upon  the  stock,  which  is  liabel 
to  contribute  to  and  be  assessed  as  aforesaid  for  the  pay- 
ment of  the  valid  debts  and  obligations  of  the  said  corpora- 
tion, then  the  said  executors  of  said  James  S.  Waterman, 
deceased,  shall  be  required  to  pay  also,  upon  the  said  stock 

*The  Court's  examination  of  some  of  the  testimony  is  omitted. 


WINSTON  V.  THE  DORSETT  PIPE  &  PAVING  CO.      937 

taken  by  James  S.  Waterman  as  trustee,  such  sum  as  may 
be  necessary  to  pay  said  deficiency."  The  executors  are 
assessed  upon  the  $10,000.00  of  stock,  subscribed  for  by 
Waterman  individually. 

We  cannot  see  why,  under  the  facts  disclosed  by  this 
record,  the  decree  of  the  court  below  is  erroneous  in  hold- 
ing, that  the  trustee  stock  should  not  be  assessed  prinTarily 
and  in  the  first  instance,  as  between  these  three  appellants 
and  the  Waterman  estate.  The  decree  does  not  require 
the  appellants  to  pay  more  than  they  owe.  Neither  of  them 
ever  paid  his  subscription  to  the  capital  stock  in  full.  Unpaid 
subscriptions  to  the  capital  stock  of  a  corporation  constitute 
a  trust  fund,  which  may  be  subjected  to  the  payment  of  the 
debts,  like  any  other  asset.  The  assessments  made  by  the 
present  decree  against  the  appellants  respectively  do  not 
exceed,  or  equal,  the  several  amounts  due  from  them  upon 
their  unpaid  subscriptions.  There  is  no  hardship  in  requir- 
ing them  to  carr}^  out  the  arrangement  as  to  the  trustee 
stock,  made  with  Waterman  in  their  presence  and  with  their 
consent,  and  of  which  they  reaped  the  benefit  by  a  speedy 
organization  of  the  Pipe  and  Paving  Company. 

In  most  of  the  cases,  where  subscriptions  to  the  capital 
stock  of  corporations  have  been  condemned,  as  being  con- 
ditional, or  accompanied  by  secret  or  qualifying  agreements, 
the  rights  of  creditors  or  stockholders  have  been  prejudiced. 
Creditors  are  entitled  to  look  to  the  stock  as  it  appears  upon 
the  face  of  the  subscription  list.  Each  stockholder  has  a 
vested  right  in  the  contract  for  subscription  of  every  other 
stockholder.  In  the  case  at  bar,  no  creditor  is  injured, 
and  no  creditor  is  complaining.  The  appellant  stockholders 
cannot  object  to  the  release  of  stock,  which  they  permitted 
to  be  subscribed  for  with  the  understanding  that,  so  far 
as  they  themselves  were  concerned,  it  should  be  released. 
We  are  of  the  opinion  that  the  Appellate  Court  committed 
no  error  in  affirming  the  decree  of  the  Circuit  Court. 

The  Judgment  of  the  Appellate  Court  is,  therefore, 
affirmed. 

Judgment  affirmed. 


938  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 


FIRST  NATIONAL  BANK  OF  DEADWOOD 

V. 

GUSTIN  MINERVA  CONSOLIDATED  MINING  CO. 
In  the  Supreme  Court  of  Minnesota,  1890. 

42  Minnesota  Reports,  327. 

Mitchell,  J.  This  action  was  brought  upon  a  debt  of 
the  defendant  company,  a  corporation  organized  under  the 
laws  of  Dakota  territory,  and  against  the  other  defendants, 
citizens  of  this  state,  as  stockholders,  to  obtain  judgment 
against  the  company  for  the  amount  of  the  debt,  and  against 
the  other  defendants  for  the  respective  amounts  alleged  to 
be  due  and  unpaid  on  the  stock  held  by  them,  so  far  as 
necessary  to  satisfy  the  judgment  against  the  corpora- 
tion.    *      *     *  ^ 

The  findings  of  fact,  so  far  as  here  material,  are,  in  sub- 
stance, as  follows:  Prior  to  November  13,  1886,  there  had 
been  organized,  and  were  at  that  date  in  existence,  under 
the  laws  of  Dakota,  two  mining  corporations,  viz.,  the  Gustin 
Belt  Gold  Mining  Company,  and  the  Minerva  Mining  Com- 
pany, of  the  latter  of  which  the  plaintiff,  a  national  banking 
association  of  Deadwood,  Dak.  was  a  creditor.  On  the  date 
named  the  defendant  corporation  was  organized  for  the  pur- 
pose and  with  intention  of  consolidating  the  other  two  com- 
panies, acquiring  their  property,  and  with  the  property  so  ac- 
quired carrying  on  a  general  mining  business.  "At  the  time 
of  the  organization  of  the  defendant  company,  and  as  the 
scheme  on  which  the  same  was  based,  it  was  agreed  by  the 
parties  so  incorporating,  and  by  those  representing  and  hav- 
ing authority  to  act  for  the  two  existing  companies,  that  all 
the  mines  and  mining  property  of  such  two  corporations 
should,  upon  its  organization,  be  transferred  and  conveyed 
to  the  new.  or  defendant,  company,  and  constitute  its  en- 


'  The  Court's  discussion  of  certain  matters  of  practice  are  omitted. 


NATIONAL  BANK  v.  MINING  CO.  939 

tire  capital  stock  and  resources  for  the  prosecution  of  its 
enterprise,  and  be  represented  in  such  organization  by  a 
nominal  capital  stock  of  $2,500,000,  divided  into  250,000 
shares,  of  $10  each,  which  should  all  be  deemed  and  held 
as  represented  by  the  properties  so  conveyed  to  it ;  that 
50,000  of  said  shares  should  be  issued  to  the  former  share- 
holders of  each  of  the  two  old  companies,  and  the  remain- 
ing 150,000  shares  belong  to  and  constitute  the  working 
capital  of  the  new  corporation,  and  be  sold  under  its  au- 
thority, and  on  such  terms  as  it  should  direct;  and  the 
proceeds  of  such  sales  constitute  a  fund  to  pay  off  the  debts 
on  the  properties,  and  develop  the  mines  thereon,  and  be 
used  generally  in  the  prosecution  of  the  business  of  the 
new  corporation,  for  the  benefit  of  all  its  stockholders.  That 
it  was  never  expected  or  intended  by  such  corporation,  or  by 
those  to  whom  its  stock  was  issued,  that  any  subscription 
to  the  capital  stock  of  the  new  company  should  ever  be  made, 
or  that  any  capital  stock  should  ever  be  taken,  or  any  capital 
subscribed  for  or  paid  in,  except  by  conveyance  to  it  of  the 
mining  properties  referred  to,  and  the  sale  of  the  stock 
reserved  for  its  working  capital,  in  open  market,  for  such 
sum  as  could  be  obtained  therefor."  This  scheme  was  car- 
ried into  effect  by  the  conveyance  to  the  new  or  defendant 
corporation  of  the  properties  of  the  two  old  corporations, 
and  the  issue  to  their  stockholders,  according  to  their  respec- 
tive holdings,  of  100,000  shares  of  the  stock  of  the  new 
company  (called  in  the  findings  "Old  Company  Stock")  as 
paid-up  stock,  and  by  placing  the  remaining  150,000  in 
charge  of  the  board  of  directors,  to  be  by  them  sold  in  the 
open  market  for  such  price  per  share  (not  less  than  50  cents) 
as  could  be  obtained  therefor.  The  mining  properties  of  the 
two  old  companies  conveyed  to  the  new  company  were  not 
worth  to  exceed  $50,000  cost,  and  were  at  the  time  of  this 
scheme  of  consolidation  considered  and  estimated  as  of  the 
aggregate  value  of  $100,000.  The  new  and  defendant  com- 
pany assumed  payment  of  the  indebtedness  of  the  Alinerva 
Mining  Company   to  the   plaintitl,    which    consented    to    a 


940  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

novation  of  its  debt,  accepting  the  notes  of  the  defendant 
company  in  place  of  those  of  the  old  Minerva  Company. 
This  is  the  claim  upon  zvhich  this  action  is  brought.  The 
court  also  finds  "that  the  payees  in  said  notes  named,  and 
the  general  managing  officer  of  the  plaintiff,  well  knew, 
at  the  time  of  the  execution  of  said  notes  and  of  their  in- 
dorsement and  delivery  to  the  plaintiff,  all  the  facts  herein- 
before stated,  relating  to  the  organization  of  the  defendant 
corporation  and  the  understanding  and  plan  of  its  organiza- 
tion, and  so  dealt  with  the  defendant  knowing  such  matters, 
and  were  parties  to  and  interested  in  the  original  scheme  of 
the  incorporation  of  the  defendant  company  as  in  the  find- 
ings set  forth."  This  must  be  construed  as  meaning  that  the 
"general  managing  officer"  referred  to  is  the  person  who 
transacted  the  business  with  the  defendant  company  in  tak- 
ing these  notes,  and  of  the  benefit  of  whose  action  in  that 
regard  the  plaintiff  has  availed  itself.  Notice  to  him  must  be 
deemed  notice  to  the  plaintiff. 

Returning,  now,  to  the  subsequent  management  of  the 
affairs  of  the  defendant  company,  the  board  of  directors, 
pursuant  to  the  scheme  of  organizrtion,  offered  for  sale  in 
the  open  market  the  150,000  shares  remaining  in  the 
treasury,  as  fully  paid-up  stock,  and  some  of  it  was  bought  as 
such  by  the  other  defendants  in  good  faith,  for  a  price  ex- 
ceeding its  fair  market  value,  (but  not  exceeding  one  dollar 
per  share,)  believing  it  to  be  fully  paid-up  stock.  This  is 
called  in  the  findings  "Treasury  Stock."  The  holders  of 
the  old  company  stock  also  placed  their  stock  in  the  market, 
some  of  which  the  defendants  also  bought,  under  like  cir- 
cumstances and  in  the  same  belief.  In  March,  1887,  the 
board  of  directors,  pursuant  to  a  resolution  adopted  by  them, 
distributed  pro  rata  among  the  individual  shareholders  all 
the  stock  remaining  unsold  in  the  treasury.  Of  this  the  in- 
dividual defendants  received  their  respective  shares,  for 
which  they  paid  nothing.  This  is  called  in  the  findings 
"Pro  rate  Stock."  The  court  also  finds  that  none  of  such 
defendants   ever  contracted,   promised,   or  in  any  manner 


NATIONAL  BANK  v.  MINING  CO.  941 

agreed,  or  intended  to  contract,  promise,  or  agree,  to  pay,  on 
account  of  such  stock,  any  other  or  different  or  greater  sum 
or  consideration,  unless  the  law  would  impose  or  imply  such 
promise,  contract,  or  agreement  from  the  foregoing  facts 
The  holdings  of  the  defendants  consist,  in  part,  of  old  com- 
pany stock,  in  part  of  treasury  stock,  and  in  part  of  private 
stock. 

The  contention  of  the  plaintiff  is  that  the  defendant 
shareholders  are  individually  liable,  as  for  unpaid  stock  sub- 
scriptions, for  amounts  equal  to  the  amount  of  their  stock, 
less  the  value  of  what  they  have  actually  paid  therefor,  viz., 
nine  dollars  per  share  on  the  old  company  and  treasury  stock, 
for  which  they  paid  in  value  only  one  dollar  per  share,  and 
ten  dollars  per  share  on  the  pro  rate  stock,  for  which  they 
paid  nothing.  If  these  stockholders  were  indebted  to  the 
corporation  for  unpaid  instalments  on  stock,  this  debt  would 
be  an  asset  of  the  corporation  which,  in  case  it  became  in- 
solvent, any  creditor  might  always  enforce  for  the  purpose 
of  satisfying  his  claim.  But  it  is  very  clear  from  the  facts 
that  the  defendant  company  has  no  claim  against  the  de- 
fendant stockholders.  They  owe  it  nothing.  As  between 
them  and  it,  the  arrangement  by  which  this  stock  was  issued 
and  sold,  or  given  away,  as  fully  paid  stock,  is  entirely  valid. 
But  the  plaintiff  bases  its  claim  upon  the  familiar  doctrine 
that  the  capital  stock  of  a  corporation  is  a  trust  fund  for  the 
benefit  of  its  creditors,  and  that,  if  shares  are  not  in  fact 
paid  up,  an  arrangement  between  the  corporation  and  the 
shareholders  that  they  shall  be  deemed  paid  up,  although 
valid  between  the  company  and  the  stockholder,  will  be  in- 
effectual as  to  creditors,  and  that  equity  will  hold  the  share- 
holder liable  for  the  amount  not  in  fact  paid  on  his  stock,  to 
the  extent  necessary  to  satisfy  the  demands  of  creditors.  We 
waive  consideration  of  the  question  (which  may,  at  least, 
admit  of  doubt)  whether  plaintiff's  complaint  is  sufficient  to 
entitle  it  to  such  relief.  See  Phelan  v.  Hazard,  5  Dill.  45 ; 
Cook,  Stocks,  §  47;  Scovill  v.  Thayer,  105  U.  S.  143. 

The  general  proposition  advanced  by  plaintiff  cannot  be 


942  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

controverted,  but  the  principle  upon  which  this  trust  in  favor 
of  creditors  rests  and  is  administered  must  not  be  overlooked. 
The  whole  doctrine  that  the  capital  stock  of  corporations  is 
a  trust  fiund  for  the  payment  of  creditors  rests  upon  the 
equitable  consideration  that  the  distribution  of  the  capital 
among  stockholders  without  making  adequate  provisions  for 
the  payment  of  debts,  or  the  issue  of  fictitiously  paid-up 
stock,  is  a  fraud  upon  creditors  who  contract  with  the  cor- 
poration in  reliance  upon  its  capital  remaining  intact,  or  in 
reliance  upon  the  professed  capital  having  been  in  fact  paid 
up  in  full.  But  when  the  reason  for  the  rule  does  not  exist 
the  rule  itself  ceases  to  apply.  This  trust  does  not  arise 
absolutely  in  every  case,  in  favor  of  every  and  atiy  creditor. 
It  is  not  true,  and  no  case  can  be  found  which  holds  that  it 
is  in  the  power  of  a  creditor  in  every  and  all  cases,  as  a  mat- 
ter of  right,  to  institute  an  inquiry  as  to  the  value  or  amount 
of  the  consideration  given  for  stock  issued  as  fully  paid  up, 
any  more  than  that  it  would  be  his  right,  in  any  and  every 
case,  to  inquire  into  the  distribution  of  the  capital  among 
the  shareholders.  It  is  only  those  creditors  who  can  fairly 
allege  that  they  have  relied,  or  whom  the  law  presumes  to 
have  relied,  upon  the  amount  of  capital  stock  of  the  com- 
pany, who  have  a  right  to  make  such  inquiry,  or  in  whose 
favor  equity  will  impress  a  trust  upon  the  subscription  to 
the  stock,  and  set  aside  a  fictitious  arrangement  for  its  pay- 
ment. For  example,  to  distribute  the  capital  among  the 
shareholders  without  provision  for  paying  corporate  debts 
would  be  a  fraud  on  existing  creditors,  as  well  as  on  such 
subsequent  creditors  as  deal  with  the  corporation  in  reliance 
upon  the  assumption  that  its  professed  capital  remains  in- 
tact. An  illustration  of  this  kind  is  to  be  found  in  the  very 
first  case  in  which  what  is  now  called  the  "American  doc- 
trine" was  announced  by  Justice  Story.  We  refer  to  the  case 
of  Wood  V.  Diimmcr,  3  Mason,  308,  where  a  banking  as- 
sociation distributed  three-fourths  of  its  capital  among  its 
shareholders  without  providing  for  the  payment  of  bill- 
holders,  and  the  court  impressed  a  trust  in  their  favor  upon 


NATIONAL  BANK  v.  MINING  CO.  943 

the  capital  in  the  hands  of  the  shareholders.  So,  again, 
where  corporations  have  organized  and  engaged  in  business 
with  a  certain  amount  of  ostensible  and  professed  paid-up 
capital,  but  which  was  not  in  fact  paid  in,  there  are  numerous 
cases  in  which  the  courts  have  set  aside  the  arrangement  by 
which  the  stock  was  called  "paid-up."  and  impressed  a  trust 
upon  the  subscription  of  the  shareholder  in  favor  of'  sub- 
sequent creditors  who  relied  upon,  or  whom  the  law  would 
presume  to  have  relied  upon,  the  apparent  and  professed 
amount  of  capital.  To  this  class  belong  many  of  the  cases 
cited  by  plaintiff,  as,  for  example,  Scnvyer  v.  Hoag,  ly  Wall. 
6io;  Wetherhee  v.  Baker,  35  N.  J.  Eq.  501. 

While  the  courts  have  not  always  had  occasion  to  state 
the  limitations  upon  the  doctrine  that  "the  capital  is  a  trust 
fund  for  the  benefit  of  creditors,"  yet  we  think  that  it  will 
be  found  that  in  every  case  where  they  have  impressed  a 
trust  upon  the  subscription  of  the  shareholders,  it  has  been 
in  favor  of  creditors  becoming  such  afterwards,  and  hence 
fairly  to  be  presumed  as  relying  upon  the  amount  of  capital 
which  the  company  was  represented  as  having.  We  are 
referred  to  none,  and  have  found  none,  where  any  such 
trust  has  been  enforced  in  favor  of  creditors  who  have  dealt 
with  the  corporation  with  full  knowledge  of  the  facts.  The 
reason  is  apparent,  for  in  such  cases  no  fraud,  actual  or 
constructive,  has  been  committed  on  such  creditors.  If  a 
corporation  issue  new  shares  after  the  claim  of  a  creditor 
arose,  it  is  clear  that  the  latter  could  not  have  dealt  with  the 
company  on  the  faith  of  any  capital  represented  by  them. 
Whatever  was  contributed  as  capital  in  respect  of  the  new 
shares  was  a  clear  gain  to  the  creditor's  security.  So,  too. 
if  a  party  deals  with  a  corporation  with  full  knowledge  of 
the  fact  that  its  nominal  paid-up  capital  has  not  in  fact  been 
paid  for  in  money  or  property  to  the  full  amount  of  its  par 
value,  he  deals  solely  on  the  faith  of  what  has  been  actually 
paid  in,  and  has  no  equitable  right  to  insist  on  the  contribu- 
tion of  a  greater  amount  of  capital  by  the  shareholders  than 
the  corporation  itself  could  claim  as  part  of  its  assets.     Coit 


944  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

V.  Gold  Amalgamating  Co.,  14  Fed.  Rep.  12,  same  case  119 
U.  S.  343,  (7  Sup.  Ct.  Rep.  231.)  This  doctrine  with 
respect  to  trusts  has  no  appHcation  to  a  case  where  a  party, 
like  the  plaintiff,  was  cognizant  of  the  whole  arrangement 
under  which  the  stock  of  the  defendant  company  was  issued, 
and  of  what  was  paid  or  intended  to  be  paid  for  it,  and  who 
accepted  a  novation  of  its  debt  with  full  knowledge  of  these 
facts,  and  received  as  great  or  greater  security  for  it  than 
it  had  before.  To  hold  otherwise  would  be  to  perpetrate  a 
fraud  on  the  stockholders,  and  not  on  the  creditors. 

These  views  effectually  dispose  of  the  question  of  the 
liability  of  the  defendants,  at  least  on  account  of  their  old 
company  and  treasury  stock.  We  think  it  also  logically  fol- 
lows from  what  we  have  said  that  the  defendants  are  not 
liable  to  the  plaintiff  upon  their  "pro  rate"  stock  as  for  un- 
paid stock  subscriptions.  This  stock  had  not  been  issued  when 
plaintiff's  debt  was  contracted.  It  could  not  have  dealt  with 
the  company  on  the  faith  of  any  capital  represented  by  these 
shares.  In  fact,  it  knew  that  no  such  capital  had  been  paid 
in,  unless  the  mining  properties  of  the  two  old  companies 
can  be  considered  as  represented  in  part  by  them ;  and  the 
value  of  these  properties  remained  the  same,  and  they  were 
equally  available  to  creditors,  whether  represented  by 
100,000  shares  or  250,000  shares  of  stock.  Under  such  cir- 
cumstances, the  plaintiff  has  no  equitable  right  to  insist  on 
the  contribution  of  a  greater  amount  of  capital  by  the  holders 
of  these  shares  than  the  corporation  itself  could  insist  on. 
2  Mor.  Priv.  Corp.  §§  832,  833. 

Judgment  affirmed.^ 


*  For  other  cases  in  accord  with  the  proposition  that  the  creditor's 
knowledge  that  stock  is  not  to  he  paid  in  full  presents  recoi'ery,  see 
Thompson  on  Corporations,  Edition  of  1900,  §5022.  Compare:  cases 
ibid..  §5028. 

For  cases  Iiolding  that  creditors  zvho  extended  credit  to  the  cor- 
poration prior  to  the  issue  of  watered  stock  cannot  recover  from  the 
holders  of  such  stock,  see  Thompson  on  Corporations,  Edition  1910, 
§5021.  note  92. 

Compare  with  our  principal  case:  East  on  National  Bank  v.  Ameri- 
can Brick  and  Tile  Co.,  70  N.  J.  Eq.  732,  1905.  (A  statute  provided 
that  "where  the  wtiole  capital  of  a  corporation  shall  not  have  been  paid 


NATIONAL  BANK  v.  MINING  CO.  945 

in,  and  the  capital  paid  shall  be  insufficient  to  satisfy  the  claims  of  its 
creditors,  each  stockholder  shall  be  bound  to  pay  on  each  share  held 
by  him  the  sum  necessary  to  complete  the  amount  of  such  share,  as 
fixed  by  the  charter  of  the  company,  or  such  proportion  of  that  sum 
as  shall  be  required  to  satisfy  the  debts  of  the  company."  A  Company 
was  organized  and  issued  "full  paid"  stock,  where  this  was  not  the  case 
in  fact,  A  received  some  of  the  stock  and  subsequently  became  a 
creditor  of  the  Company.  Held,  that  A  w^s  not  debarred  from  par- 
ticipating as  a  creditor  in  proceedings  taken  to  enforce  the  liability  of 
delinquent  creditors.  Pitney,  J. :  "This  brings  us  to  a  consideration 
of  the  grounds  upon  which  the  learned  vice-chancellor  denied  the  re- 
ceiver's prayer  for  relief  so  far  as  the  Green  claims  are  concerned. 
There  is  a  line  of  reported  cases  holding  that  stockholders  who  parti- 
cipate or  aid  in  the  issue  of  paid-up  stock  upon  payment  of  less  than  its 
par  value,  or  who  have  knowledge  of  the  act  and  acquiesce  therein,  can- 
not afterwards  complain  of  the  transaction,  either  as  stockholders  or 
as  creditors.  Some  of  these  are  cited  in  Cook  Stock,  §39,  referred  to 
in  the  opinion  of  the  vice-chancellor.  Others  will  be  cited  below.  So 
far  as  we  have  observed,  however,  all  well-considered  decisions  that 
adopt  this  doctrine  are  based  upon  general  principles  of  equity,  in  the 
absence  of  any  controlling  statute  or  public  policy,  resort  being  had 
alone  to  the  'trust  fund  theory'  as  a  basis  for  the  stockholder's  liability 
to  creditors.  *  *  *  But  so  far  as  this  so-called  'trust  fund  doc- 
trine' excludes  any  creditors  from  relief  against  the  stockholders,  it 
does  so  on  the  theory  that  the  liability  of  the  latter  rests  alone  upon 
their  having  held  out  the  capital  of  the  company  to  persons  extending 
credit  to  it  as  the  source  from  which  repayment  might  be  expected.  If 
this  be  the  only  foundation  of  the  stockholder's  liability,  it  is  perhaps 
not  irrational  to  debar  creditors  whose  claims  accrued  prior  to  the 
stock  issue  in  question,  and  subsequent  creditors  who  had  notice  when 
they  extended  credit  that  the  stock  issue  did  not  represent  in  whole 
or  in  part  what  it  purported  to  represent — that  is,  an  equivalent  amount 
in  value  added  to  the  assets  of  the  company. 

"But  in  this  state  the  stockholders'  liability  to  creditors  does  not 
depend  alone  or  chiefly  upon  the  theory  of  'holding  out.'  It  depends 
upon  the  stockholders  voluntary  acceptance,  for  consideration  touch- 
ing his  own  interest,  of 'a  statutory  scheme  to  which  watered  stock, 
under  whatever  device  issued,  is  absolutely  alien,  and  which  requires 
stock  subscriptions  to  be  made  good  for  the  benefit  of  creditors  of 
insolvent  companies,  without  distinction  between  prior  and  subsequent 
creditors,  or  between  creditors  who  had  notice  and  those  who  had 
none.") 


946  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 


HANDLEY  v.  STUTZ. 

In  the  Supreme  Court  of  the  United  States,  1891. 

139  United  States  Reports,  417. 

The  Clifton  Coal  Company  at  the  time  of  its  organiza- 
tion had  a  capital  of  $120,000,  divided  into  shares  of  $100 
each,  with  power  to  increase  its  capital  to  $200,000.  Being 
led  to  believe  that  its  coal  would  coke,  and,  therefore,  its 
products  could  be  profitably  extended  from  grate  and  steam 
purposes  to  iron-making  coke,  and  needing  money  to  make 
the  necessary  changes  in  the  plant,  the  Company  decided  to 
issue  $50,000  worth  of  bonds,  secured  by  a  trust  mortgage. 
Finding  that  the  bonds  were  unsalable,  the  Company  de- 
cided to  increase  its  capital  stock  to  $200,000,  and  offer  to 
the  purchasers  of  the  bonds,  as  a  bonus,  an  equal  amount  of 
the  new  stock.  This  plan  was  carried  out,  each  purchaser 
of  a  $1,000  bond  receiving  ten  shares  of  new  stock,  the  re- 
ceipts reciting  that  the  stock  "was  issued  with  bonds  for  the 
same  amount,  as  per  agreement."  The  certificates,  on  their 
face,  recited  that  the  shares  of  stock  were  fully  paid  up  "and 
were  non-assessable." 

The  remaining  $30,000  shares  of  increased  stock,  which 
were  not  needed  to  secure  the  subscribers  to  the  bonds,  ap- 
peared to  have  been  distributed  pro  rata  among  the  old  stock- 
holders. In  the  latter  part  of  1887,  and  in  the  early  part  of 
the  following  year,  plaintiffs  obtained  judgments  against 
the  company,  which  were  unsatisfied,  and  in  September, 
1887,  by  an  order  of  the  Circuit  Court  of  Hopkins  County, 
Kentucky,  the  entire  property  of  the  company  was  placed 
in  the  hands  of  a  receiver,  and  its  operations  stopped. 

On  Februai-y  8,  1889,  this  bill  was  filed  against  the  coal 
company  and  the  holders  of  this  increased  stock,  to  compel 
payment  therefor,  and  to  recover  the  amounts  of  the  judg- 
ments against  the  company.  The  court  dismissed  the  bill  as 
to  three  of  the  defendants  not  served  with  process,  and  as  to 


HANDLEY  r.  STUTZ  947 

the  rest  held  them  liable  to  all  the  creditors  of  the  Company 
whose  debts  originated  after  the  alleged  increase  of  stock, 
and  fixed  May,  1886,  as  the  date  of  such  increase.  As  to 
debts  contracted  prior  to  that  date,  they  were  excluded  be- 
cause, as  between  the  company  and  the  stockholders,  the  lat- 
ter held  such  stock  properly,  and  without  liability  to  the  com- 
pany, and  all  creditors  who  dealt  with  the  company  prior  to 
such  increase,  and  not  upon  the  faith  of  such  stock,  had  no 
equity  to  demand  more  than  the  company  itself  could.  Five 
of  the  defendants  against  whom  decrees  were  rendered  in 
excess  of  $5000  appealed  to  this  court,  and  the  Circuit 
Court  suspended  the  execution  of  the  decree  as  to  those  who 
could  not  appeal,  until  this  court  should  determine  the  rights 
of  the  appellants. 

The  opinion  of  the  Circuit  Court  is  reported  in  41  Fed. 
Rep.  531.1 

Mr.  Justice  Brown :  ^  So  far  as  the  question  of  liability 
to  the  proposed  assessments  is  concerned,  these  defendants, 
with  respect  to  their  relations  to  this  corporation,  are  divi- 
sible into  two  distinct  classes :  First,  those  of  the  original 
stockholders  who  received  the  $30,000  increased  stock  as  a 
gift;  second,  those  who  subscribed  to  the  $50,000  bonds,  and 
received  an  equal  amount  of  stock,  as  a  bonus  or  inducement 
to  make  the  subscription.     *     ♦     *3 

Somewhat  different  conditions  apply  to  those  who  sub- 
scribed for  the  bonds  of  the  company,  with  the  understand- 
ing that  they  were  to  receive  an  amount  of  stock  equal  to  the 
bonds  as  an  additional  inducement  to  their  subscription.  The 
facts  connected  with  this  transaction  are  substantially  as  fol- 
lows :   Some  three  years  after  the  company  was  organized  it 


'  The  facts  are  restated. 

'  The  Court's  discussion  of  certain  questions  pertaining  to  the 
action  taken  at  the  meeting  of  stockholders  which  authorized  the  in- 
crease is  omitted. 

'  The  Court's  discussion  of  the  HabiHty  of  the  original  stockholders 
in  so  far  as  they  had  received  part  of  the  stock  increase  is  omitted. 
The  Court  held  that  such  stockholders  were  liable  for  the  full  value 
of  the  stock  to  creditors  who  had  given  credit  to  the  Company  after 
the  increase. 


948  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

became  apparent  that  the  enterprise,  as  originally  contem- 
plated, namely,  the  mining  and  selling  of  coal  for  steam  and 
domestic  purposes,  was  not  likely  to  be  a  success,  owing  to 
the  inferior  character  of  the  product;  and  the  only  hope  of 
the  company  lay  in  the  manufacture  of  the  coal  into  an  iron- 
making  coke,  that  is,  a  coke  containing  a  percentage  of 
sulphur  low  enough  to  admit  of  the  manufacture  of  mer- 
chantable pig  iron.  To  embark  in  this,  however,  money  was 
needed,  and  as  the  stock  of  the  company  was  «ot  worth  more 
than  50  cents  on  the  dollar,  it  was  evident  this  could  not  be 
effected  simply  by  the  issue  of  new  stock.  It  was  proposed 
at  the  meeting  in  March  that  money  should  be  raised  by  the 
issue  of  $50,000  of  bonds,  with  which  to  add  the  requisite 
structures  to  the  plant.  But  it  was  soon  evident  that  the 
bonds  could  not  be  negotiated  without  the  stock,  and,  acting 
upon  the  suggestion  of  a  Nashville  banker,  it  was  resolved 
at  the  meeting  in  May  that  the  stock  should  be  increased  800 
shares,  500  of  which  should  be  turned  over  to  the  sub- 
scribers to  the  bonds,  as  a  bonus  or  an  additional  considera- 
tion. The  evidence  is  uncontradicted  that  the  bonds  could 
not  have  been  negotiated  without  the  stock;  that  they  were 
both  sold  as  a  whole ;  that  the  transaction  was  in  good  faith, 
and,  considering  the  risk  that  was  taken  by  the  subscribers, 
the  price  paid  for  the  stock  and  bonds  was  fair  and  reason- 
able. The  directors  appear  to  have  done  all  in  their  power 
to  obtain  the  best  possible  terms,  and  there  is  no  imputation 
of  unfair  dealing  on  the  part  of  any  one  connected  with  the 
transaction.  At  that  time  the  mines  and  property  of  the 
company  were  in  good  condition,  and  the  prospects  of  suc- 
cess were  fair. 

The  case  then  resolves  itself  into  the  question  whether 
an  active  corporation,  or  as  it  is  called  in  some  cases,  a 
"going  concern,"  finding  its  original  capital  impaired  by  loss 
or  misfortune,  may  not,  for  the  purpose  of  recuperating 
itself  and  providing  new  conditions  for  the  successful  prose- 
cution of  its  business,  issue  new  stock,  put  it  upon  the  mar- 
ket and  sell  it  for  the  best  price  that  can  be  obtained.     The 


HANDLEY  v.  STUTZ  949 

question  has  never  been  directly  raised  before  in  this  court, 
and  we  are  not,  consequently,  embarrassed  by  any  previous 
decisions  on  the  point.  In  the  Upton  Cases,  arising  out  of 
the  failure  of  the  Great  Western  Insurance  Company ;  in 
Hatch  V.  Dana,  loi  U.  S.  205,  and  in  Hazvkins  v.  Glenn, 
131  U.  S.  319,  the  defendants  were  either  original  sub- 
scribers to  the  increased  stock,  at  a  price  far  below  its  par 
value,  or  transferees  of  such  subscribers;  and  the  stock  was 
issued,  not  as  in  this  case  to  purchase  property  or  raise 
money  to  add  to  the  plant,  and  facilitate  the  operations  of 
the  company,  but  simply  to  increase  its  original  stock  in 
order  to  carry  on  a  larger  business,  and  the  stock  thus  is- 
sued was  treated  as  if  it  formed  a  part  of  the  original  capital. 
In  County  of  Morgan  v.  Allen,  103  U.  S.  498,  the  same  prin- 
ciple was  applied  to  a  subscription  by  a  county  to  the  capital 
stock  of  a  railroad  company,  for  which  it  had  issued  its 
bonds,  although  such  bonds  had  been  surrendered  to  the 
county  with  the  consent  of  certain  of  its  creditors. 

To  say  that  a  corporation  may  not,  under  the  circum- 
stances above  indicated,  put  its  stock  upon  the  market  and 
sell  it  to  the  highest  bidder,  is  practically  to  declare  that  a 
corporation  can  never  increase  its  capital  by  a  sale  of  shares, 
if  the  original  stock  has  fallen  below  par.  The  wholesome 
doctrine,  so  many  times  enforced  by  this  court,  that  the 
capital  stock  of  an  insolvent  corporation  is  a  trust  fund  for 
the  payment  of  its  debts,  rests  upon  the  idea  that  the  cred- 
itors have  a  right  to  rely  upon  the  fact  that  the  subscribers 
to  such  stock  have  put  into  the  treasury  of  the  cor- 
poration, in  some  form,  the  amount  represented  by  it;  but 
it  does  not  follow  that  every  creditor  has  a  right  to  trace 
each  share  of  stock  issued  by  such  corporation,  and  inquire 
whether  its  holder,  or  the  person  of  whom  he  purchased,  has 
paid  its  par  value  for  it.  It  frequently  happens  that  corpora- 
tions, as  well  as  individuals,  find  it  necessary  to  increase 
their  capital  in  order  to  raise  money  to  prosecute  their  busi- 
ness successfully,  and  one  of  the  most  frequent  methods  re- 
sorted to  is  that  of  issuing  new  shares  of  stock  "and  putting 


950  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

them  upon  the  market  for  the  best  price  that  can  be  obtained ; 
and  so  long  as  the  transaction  is  bona  fide,  and  not  a  mere 
coyer  for  "watering"  the  stock,  and  the  consideration  ob- 
tained represents  the  actual  value  of  such  stock,  the  courts 
have  shown  no  disposition  to  disturb  it.  Of  course  no  one 
would  take  stock  so  issued  at  a  greater  price  than  the  orig- 
inal stock  could  be  purchased  for,  and  hence  the  ability  to 
negotiate  the  stock  and  to  raise  the  money  must  depend  upon 
the  fact  whether  the  purchaser  shall  or  shall  not  be  called 
upon  to  respond  for  its  par  value.  While,  as  before  ob- 
served, the  precise  question  has  never  been  raised  in  this 
court,  there  are  numerous  decisions  to  the  effect  that  the  gen- 
eral rule  that  holders  of  stock,  in  favor  of  creditors,  must 
respond  for  its  par  value,  is  subject  to  exceptions  where  the 
transaction  is  not  a  mere  covcer  for  an  illegal  increase. 

Thus  in  A^^^e'  Albany  v.  Burke,  1 1  Wall.  96,  a  city  sub- 
scribed to  the  stock  of  a  railroad,  and  issued  bonds  for  a  part 
of  the  subscription,  agreeing  to  issue  them  for  the  rest  of  it. 
when  the  road  should  be  built  to  a  certain  point.  The  road 
relied  mainly  upon  these  bonds  to  raise  the  necessary  money. 
The  validity  of  the  bonds  being  denied  by  taxpayers,  who 
had  filed  bills  to  enjoin  the  raising  of  a  tax  to  pay  the  inter- 
est, their  value  in  the  market  was  largely  impaired,  and  it 
was  found  they  could  not  be  sold  without  a  sacrifice.  Under 
these  circumstances  the  company  applied  to  the  city  to  pay  a 
certain  sum  which  had  been  borrowed  by  the  road  upon  the 
pledge  of  the  bonds  already  issued,  with  sundry  other 
moneys,  and  in  consideration  thereof  the  city  obtained  from 
the  company  a  large  number  of  bonds  which  had  not  been 
negotiated,  and  a  cancellation  of  the  subscription.  In  a  suit 
brought  by  a  judgment  creditor  to  enforce  the  original  sub- 
scription, it  was  held  that  the  compromise  was  legal,  and  the 
payment  of  such  subscription  would  not  be  enforced,  al- 
though it  subsequently  turned  out  that  the  bonds  were  worth 
more  than  they  could  have  been  sold  for.  Said  Mr.  Justice 
Strong,  speaking  for  the  court :  "Had  the  company  sold  to 
a  stranger,  and  then  the  city  become  a  purchaser  from  the 


HANDLEY  v.  STUTZ  951 

Stranger,  it  will  not  be  contended  that  any  creditor  of  the 
company  could  complain.  And  it  can  make  no  difference 
whether  the  purchaser  was  made  directly  or  indirectly  from 
the  first  holder  of  the  bonds,  assuming  that  there  was  no 
fraud.  The  transaction  .  .  .  was,  in  substance,  plainly 
nothing  more  than  a  purchase  by  the  city  of  its  own  bonds, 
some  of  which  had  been  issued  and  others  of  which  it  was 
under  obligations  to  issue,  at  the  call  of  the  vendor.  .  .  . 
Looking  at  it  in  the  light  of  subsequent  events,  it  was  no 
doubt  an  advantageous  purchase  for  the  city;  and,  if  the  un- 
contradicted evidence  is  to  be  believed,  it  was  deemed  at  the 
time  an  advantageous  sale  or  arrangement  for  the  com- 
pany. .  .  .  We  may  add,  the  evidence  is  convincing  that 
the  contract  between  the  city  and  the  company  was  made  in 
the  utmost  good  faith,  with  no  intention  to  wrong  creditors 
of  the  latter;  that  it  was  at  the  time  considered  advan- 
tageous to  the  company,  and  it  is  not  proved  that  all  was  not 
paid  for  the  bonds  issued  and  to  be  issued  that  they  could 
have  been  sold  for  in  the  market."     *     *     *^ 

A  case  nearer  in  point  is  that  of  Clark  v.  Beaver,  ante,, 
96,  decided  at  the  present  term  of  this  court.  In  this  case,  a 
railroad  company,  of  which  defendant's  intestate  was  presi- 
dent and  stockholder,  had  a  settlement  with  a  construction 
company,  of  which  defendant's  intestate  was  also  a  mem- 
ber, for  work  done  in  building  the  road.  The  railroad  com- 
pany, being  unable  to  pay  the  claim  of  the  construction  com- 
pany, delivered  to  it  thirty-five  hundred  shares  of  its  stock 
at  20  cents  on  the  dollar,  and  the  same  were  accepted  in  full 
satisfaction  of  the  debt.  The  stock  was  not  worth  anything 
in  the  market,  and  was  issued  directly  to  the  defendant's 
intestate.  No  other  payment  than  the  20  per  cent,  was  ever 
made  on  account  of  this  stock.  A  judgment  creditor  of  the 
railroad  company  filed  a  bill  to  comjjel  the  payment  by  the 
defendant  of  his  claim,  upon  the  tlieory  that  he  was  liable 
for  the  actual  par  \'alue  of  such  stock,  whatever  may  have 

*  The    Court's    examination    of    Coit    v.    Gold     Amalgamating     Co.. 
supra,  is  omitted. 


952  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

been  its  market  value  at  the  time  it  was  received.  It  was 
held  he  could  not  recover.  "Of  course,  under  this  view," 
says  Mr.  Justice  Harlan,  in  delivering  the  opinion  of  the 
court,  ''every  one  having  claims  against  the  railway  com- 
pany— even  laborers  and  employees — who  could  get  nothing 
except  stock  in  payment  of  their  demands,  became  bound,  by 
accepting  stock  at  its  market  value  in  payment,  to  account 
to  unsatisfied  judgment  creditors  for  its  full  face  value,  al- 
though, at  the  time  it  was  sought  to  make  them  liable,  the 
corporation  had  ceased  to  exist,  or  its  stock  had  remained, 
as  it  was  when  taken,  absolutely  worthless.  .  .  .  To  say 
that  a  public  corporation,  charged  with  public  duties,  may 
not  relieve  itself  from  embarrassment  by  paying  its  debt  in 
stock  at  its  real  value — there  being  no  statute  forbidding 
such  a  transaction — without  subjecting  the  creditor,  surren- 
dering his  debt,  to  the  liability  attaching  to  stockholders  who 
have  agreed,  expressly  or  impliedly,  to  pay  the  face  value  of 
stock  subscribed  by  them,  is,  in  effect,  to  compel  them  either 
to  suspend  operations  the  moment  they  become  unable  to 
pay  their  current  debts,  or  to  borrow  money  secured  by  mort- 
gage upon  the  corporate  property." 

So  in  Fogg  v.  Blair,  ante,  ii8,  also  decided  at  the  pres- 
ent tenn,  it  was  held  to  be  competent  for  a  railroad,  exercis- 
ing good  faith,  to  use  its  bonds  or  stock  in  payment  for  the 
construction  of  its  road,  although  it  could  not,  as  against 
creditors  or  stockholders,  issue  its  stock  as  fully  paid  with- 
out getting  some  fair  or  reasonable  equivalent  for  it.  It  was 
there  said :  "What  was  such  an  equivalent  depends  pri- 
marily upon  the  actual  value  of  the  stock  at  the  time  it  was 
contracted  to  be  issued,  and  upon  the  compensation  which, 
under  all  the  circumstances,  the  contractors  were  equitably 
entitled  to  receive  for  the  particular  work  undertaken  or 
done  by  them."  It  appeared  in  that  case  that  full  and  ade- 
quate compensation  for  the  work  done  had  been  paid  by  the 
company  in  its  mortgage  bonds,  and,  as  the  bill  contained 
no  allegation  whatever  as  to  the  real  or  market  value  of  such 
stock,  it  was  held  that  the  contractors  receiving  this  stock 


HANDLEY  v.  STUTZ  953 

were  not  liable  to  creditors  for  its  par  value.  It  was  added : 
"If,  when  disposed  of  by  the  railroad  company,  it  was  with- 
out value,  no  wrong  was  done  to  creditors  by  the  contract 
made  with  Blair  and  Taylor.  If  the  plaintiff  expected  to  re- 
cover in  this  suit  on  the  ground  that  the  stock  was  of  sub- 
stantial value,  it  was  incumbent  upon  him  to  distinctly  allege 
facts  that  would  enable  the  court — assuming  such  facts,  to  be 
true — to  say  that  the  contract  between  the  railroad  company 
and  the  contractors  was  one  which,  in  the  interest  of  credi- 
tors, ought  to  be  closely  scrutinized."  It  would  seem  to  fol- 
low from  this  that  if  the  stock  had  been  of  some  value,  that 
value,  however  much  less  than  par,  would  have  been  the 
limit  of  the  holder's  liability. 

In  Morrow  v.  Nashville  Iron  and  Steel  Co.,  87  Ten- 
nessee, 262,  275,  276,  the  Supreme  Court  of  Tennessee  held, 
that  a  contract  with  a  subscriber  to  stock  of  a  corporation, 
that  for  every  share  subscribed  he  should  receive  bonds  to  an 
equal  amount,  secured  by  mortgage  on  the  company's  plant, 
is  void  as  against  creditors,  and  also  between  the  subscriber 
and  the  corporation.  But  the  court  drew  a  distinction  be- 
tween such  a  case  and  sales  of  or  subscription  to  the  stock  of 
an  organized  and  going  corporation.  It  said :  "The  neces- 
sities of  the  business  of  an  organized  company  might  de- 
mand an  increase  of  capital  stock,  and  if  such  stock  is  law- 
fully issued,  it  may  very  well  be  offered  upon  special  terms. 
In  such  case,  if  the  market  price  was  less  than  par,  it  is  clear 
that  a  purchaser  or  subscriber  for  such  stock  at  its  market 
value  would,  in  the  absence  of  fraud,  be  liable  only  for  his 
contract  price.  So  a  case  might  arise  where  the  stock  of  a 
going  concern  was  much  depreciated,  and  where  its  bonds 
were  likewise  below  par,  and  there  was  lawful  authority  to 
issue  additional  stock  and  bonds.  Now,  in  such  case,  the 
real  market  value  of  an  equal  amount  of  stock  and  bonds 
might  not  exceed,  or  even  equal,  the  par  value  of  either.  In 
sucli  cases,  the  question  of  fraud  aside,  a  purcliaser  would 
only  be  held  for  his  contract  price."    This  case  from  Tennes- 


954  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

see  puts  as  an  illustration  the  exact  case  with  which  we  are 
now  dealing. 

The  Hability  of  a  subscriber  for  the  par  value  of  in- 
creased stock  taken  by  him  may  depend  somewhat  upon  the 
circumstances  under  which,  and  the  purposes  for  which,  such 
increase  was  made.  If  it  be  merely  for  the  purpose  of  add- 
ing to  the  original  capital  stock  of  the  corporation,  and 
enabling  it  to  do  a  larger  and  more  profitable  business,  such 
subscriber  would  stand  practically  upon  the  same  basis  as  a 
subscriber  to  the  original  capital.  But  we  think  that  an 
active  corporation  may,  for  the  purpose  of  paying  its  debts, 
and  obtaining  money  for  the  successful  prosecution  of  its 
business,  issue  its  stock  and  dispose  of  it  for  the  best  price 
that  can  be  obtained.  Stein  v.  Howard,  65  California,  616. 
As  the  company  in  this  case  found  it  impossible  to  negotiate 
its  bonds  at  par  without  the  stock,  and  as  the.  stock  was 
issued  for  the  purpose  of  enhancing  the  value  of  the  bonds, 
and  was  taken  by  the  subscribers  to  the  bonds  at  a  price 
fairly  representing  the  value  of  both  stock  and  bonds,  we 
think  the  transaction  should  be  sustained,  and  that  the  de- 
fendants cannot  be  called  upon  to  respond  for  the  par  value 
of  such  stock,  as  if  they  had  subscribed  to  the  original  stock 
of  the  company.  Our  conclusion  upon  this  branch  of  the 
case  disposes  of  it  as  to  those  who  were  held  liable  by  virtue 
of  their  subscription  to  the  bonds.    *    *    +5 

Reversed  and  the  cause  remanded  for  further  pro- 
ceedings in  accordance  with  this  opinion. 

Mr.  Chief  Justice  Fuller,  with  whom  concurred  Mr. 
Justice  Lamar,  dissenting. 

I  dissent  from  the  conclusion  of  the  court  in  respect  of 
the  stock  received  by  the  subscribers  to  the  bonds.  That 
stock  was  not  paid  for  in  money  or  money's  worth,  or  issued 
in  payment  of  debts  due  from  the  company,  or  purchased  at 
sale  upon  the  market.    It  was  a  mere  bonus,  thrown  in  with 


^The  Court's  discussion  of  the  decision  of  the  Circuit  Judge  that 
only  subsequent  creditors  were  entitled  to  enforce  their  claims  against 
stockholders  is  omitted. 


HANDLEY  v.  STUTZ  955 

the  bonds  as  furnishing  the  inducement  to  the  bond  sub- 
scription, of  larger  control  over  the  corporation,  and  of  pos- 
sible gain  without  expenditure.  Becoming  secured  credi- 
tors through  the  bonds,  the  subscribers  increased  their  power 
through  the  stock.  In  my  view,  there  was  no  actual  payment 
for  the  stock,  and  to  treat  it  as  paid  up,  is  to  sanction  an  ar- 
rangement to  relieve  those  who  would  reap  the  benefit  de- 
rived from  the  possession  of  the  stock,  in  the  event  of  the 
success,  from  liability  for  the  consequences,  in  the  event  of 
the  failure,  of  the  enterprise. 

When  the  capital  stock  of  a  corporation  has  become  im- 
paired, or  the  business  in  which  it  has  engaged  has  proven  so 
unremunerative  as  to  call  for  a  change,  creditors  at  large 
may  well  demand  that  experiments  at  rehabilitation  should 
not  be  conducted  at  their  risk. 

My  brother  Lamar  concurs  with  me  in  this  dissent.^ 


"Compare  with  our  principal  case:  Rickerson  Roller-Mill  Co.  v. 
Farrell  Foundry  &  Machine  Co.,  75  Fed.  554,  1896.  (Judgment  creditors 
bill.  The  corporation  issued  $100,000  stock  for  patent  rights.  To  secure 
working  capital,  capital  stock  increased  to  $150,000.  A  agreed  to  take 
extra  stock  for  $25,000.  The  stock  was  issued  to  A  as  full  paid.  B  et 
al.,  became  creditors  of  the  Company  knowing  the  above  facts.  Lurton, 
J.:  "The  second  defense  is  that  this  increase  of  stock  was  for  the  pur- 
pose of  restoring  the  impaired  capital  of  the  Rickerson  Roller-Mill  Com- 
pany; that  the  case  was  that  of  a  going,  active  corporation,  whose  capital 
had  become  impaired,  and  whose  stock  was,  on  the  market,  worth  only 
50  cents  on  the  dollar ;  and  that,  as  the  stock  was  actually  sold  in  good 
faith  for  its  actual  market  value,  neither  the  corporation  nor  its  cred- 
itors are  injured,  and  neither  can  call  upon  such  a  purchaser  for  the  dif- 
ference betw^een  the  sum  actually  paid  and  the  par  of  the  stock.  For 
this  counsel  cite  Hundley  v.  Stutc,  139  U.  S.  417,  11  Sup.  Ct.  530;  Clark 
V.  Bever,  139  U.  S.  96,  11  Sup.  Ct.  468;  Fogg  v.  Blair,  139  U.  S.  118,  11 
Sup.  Ct.  476:  Morroiv  v.  Steel  Co.,  87  Tenn.  262,  10  S.  W.  495;  Young 
V.  Iron  Co.,  65  Mich,  ill,  31  N.  W.  814.  Were  the  circumstances  such  as 
to  enable  a  purchaser  of  these  increased  shares  to  buy  them  from  the 
company  at  less  than  their  par  value  without  incurring  a  liability  to  the 
creditors  for  the  difference  between  the  par  of  the  stock  and  the  price 
actually  paid?  The  case  for  decision  certainly  differs  most  materially 
from  Clark  v.  Bever  and  Fogg  v.  Blair.  These  shares  were  not,  as  in 
those  cases,  the  shares  of  an  insolvent  corporation,  received  by  a  credi- 
tor, in  payment  and  discharge  of  his  debt,  at  less  than  par,  and  at  a  value 
in  excess  of  the  actual  market  value.  In  neither  of  the  cases  above  re- 
ferred to  was  the  stock  taken  in  any  sense  as  an  investment,  or  for  the 
purpose  of  enabling  the  company  to  enlarge  or  increase  its  business,  but 
was  accepted  by  the  creditor,  in  each  instance,  as  the  best  settlement  ob- 
tainable from  an  insolvent  corporation.  Neither  is  this  the  case  of  a  go- 
ing corporation,  whose  capital  stock  had  become  impaired  or  diminished 
by  losses  or  misfortunes.  It  is  true  that  in  some  sense  this  corporation 
had  been  doing  business  in  a  small  way  for  a  month  or  more  before  this 


956 


LIABILITY  OF  ORIGINAL  SHAREHOLDERS 


new  stock  was  issued,  but  there  is  no  evidence  that  its  capital  stock  had 
been  impaired  by  losses.  Upon  the  contrary,  the  Messrs.  Fox  were 
admitted  as  shareholders  in  consequence  of  the  necessity  for  increasing 
the  capital  stock  of  the  company,  and  enabling  it  to  begin  the  business 
for  w'hich  it  had  been  organized.  Their  purchase  of  these  shares  was 
in  accordance  with  the  original  scheme  of  the  promoters,  and  they 
were  bought  as  an  investment  in  a  manufacturing  corporation  which 
had  not  yet  acquired  a  plant,  or  begun  the  business  for  which  it  had 
been  organized.  The  arrangement  by  which  they  were  to  buy  these 
shares  from  the  corporation,  and  pay  but  50  per  cent,  of  the  par  value 
of  the  stock,  was  subject  to  the  contingency  that  they  wpuld  be  liable, 
in  the  event  of  the  insolvency  of  the  corporation,  to  creditors  who 
should  become  such  in  ignorance  of  the  arrangement,  and  who  had  a 
right  to  suppose  that  this  increased  stock  had  been  paid  in  full,  or  was 
subject  to  call."  The  Court  held  that  the  plaintiff's  knowledge  of  the 
circumstances  under  which  A  received  the  stock,  in  the  absence  of  any 
statutory  or  charter  provisions  that  stock  should  be  paid  for  in  full, 
barred  their  right  to  recover.) 

See  V.  Heppenheimer,  69  N.  J.  Eq.  36,  1905.  (C,  et  ai,  subscribed 
to  the  bonds  of  A  Company,  and  received  with  each  bond  a  bonus  of 
stock.  Held,  that  the  fact  that  they  did  not  pay  for  the  stock  was 
sufficient  to  put  C,  et  al.,  on  notice  that  the  stock  had  not  been  paid  for 
either  in  cash  or  property,  and  that  C,  et  al.,  were  liable  to  the  Com- 
pany's creditors  thereon.) 

Key  Number  of  Amer.  Digest,  in  re  liability  of  holders  of  "bonus" 
stock  or  stock  issued  as  a  gratuity,  Corporations,  243  (6). 


HOSPES  V.  NORTHWESTERN  MFTG.  &  CAR  CO.      957 


HOSPES  V.  NORTHWESTERN  MANUFACTURING 
AND  CAR  CO- 
IN THE  Supreme  Court  of  Minnesota. 

48  Minnesota  Reports,  174.' 

Mitchell,  J.  This  appeal  is  from  an  order  overruling 
a  demurrer  to  the  so-called  "supplemental  complaint"  of  the 
Minnesota  Thresher  Manufacturing  Company.  The  North- 
Western  Manufacturing  &  Car  Company  was  a  manufactur- 
ing corporation  organized  in  May,  1882.  Upon  the  com- 
plaint of  a  judgment  creditor,  Hospes  &  Co.,  after  return 
of  execution  unsatisfied,  judgment  was  rendered  in  May, 
1884,  sequestrating  all  its  property,  things  in  action,  and  ef- 
fects, and  appointing  a  receiver  of  the  same.  This  receiver- 
ship still  continues,  the  affairs  of  the  corporation  being  not 
yet  fully  administered;  but  it  appears  that  it  is  hopelessly 
insolvent,  and  that  all  the  assets  that  have  come  into  the 
hands  of  the  receiver  will  not  be  sufficient  to  pay  any  con- 
siderable part  of  the  debts.  The  Minnesota  Thresher  Manu- 
facturing Company,  a  corporation  organized  in  November, 
1884,  as  creditor,  became  a  party  to  the  sequestration  pro- 
ceeding, and  proved  its  claims  against  the  insolvent  corpora- 
tion. In  October,  1889,  in  behalf  of  itself  and  all  other 
creditors  who  have  exhibited  their  claims,  it  filed  this  com- 
plaint against  certain  stockholders  (these  appellants)  of  the 
car  company,  in  pursuance  of  an  order  of  court  allowing  it 
to  do  so,  and  reqiiiring  those  thus  impleaded  to  appear  and 
answer  the  complaint.  The  object  is  to  recover  from  these 
stockholders  the  amount  of  certain  stock  held  by  them,  but 
alleged  never  to  have  been  paid  for.  What  was  said  in 
Meagher's  Case,  ante,  p.  158,  N.  W.  Rep.  1114  (just  de- 
cided), is  equally  applicable  here  as  to  the  right  to  enforce 
such  a  liability  in  the  sequestration  proceeding  upon  the 

'The  Reporter's  statement  of  the  facts  of  the  case  and  his  notei 
of  the  argument  of  cases  are  omitted. 


958  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

petition  or  complaint  of  creditors  who  have  become  parties 
to  it.  There  is  nothing  in  this  practice  inconsistent  with 
what  was  decided  in  Minnesota  Thresher  Mfg.  Co.  v.  Lang- 
don,  44  Minn.  37,  (46  N.  W.  Rep.  310).  The  complaint  is 
not  the  commencement  of  an  independent  action  by  creditors 
in  their  own  behalf,  antagonistic  to  the  rights  of  the  receiver, 
but  is  filed  in  the  sequestration  proceeding  itself,  and  in  aid 
of  it. 

The  principal  question  in  the  case  is  whether  the  com- 
plaint states  facts  showing  that  the  thresher  company,  as 
creditor,  is  entitled  to  the  relief  prayed  for;  or,  in  other 
words,  states  a  cause  of  action.  Briefly  stated,  the  allega- 
tions of  the  complaint  are  that  on  May  10.  1882,  Seymour, 
Sabin  &  Co.  owned  property  of  the  value  of  several  million 
dollars,  and  a  business  then  supposed  to  be  profitable.  That, 
in  order  to  continue  and  enlarge  this  business,  the  parties  in- 
terested in  Seymour,  Sabin  &  Co.,  with  others,  organized  the 
car  company,  to  which  was  sold  the  greater  part  of  the  assets 
of  Seymour,  Sabin  &  Co.  at  a  valuation  of  $2,267,000,  in 
payment  of  which  there  were  issued  to  Seymour,  Sabin  & 
Co.  shares  of  the  preferred  stock  of  the  car  company  of  the 
par  value  of  $2,267,000,  it  being  then  and  there  agreed  by 
both  parties  that  this  stock  was  in  full  payment  of  the  prop- 
erty thus  purchased.  It  is  further  allaged  that  the  stock- 
holders of  Seymour,  Sabin  &  Co.,  and  the  other  persons  who 
had  agreed  to  become  stockholders  in  the  car  company,  were 
then  desirous  of  issuing  to  themselves,  and  obtaining  for 
their  own  benefit,  a  large  amount  of  common  stock  of  the  car 
company,  "without  paying  therefor,  and  without  incurring 
any  liability  thereon  or  to  pay  therefor;"  and  for  that  pur- 
pose, and  "in  order  to  evade  and  set  at  naught  the  laws  of 
this  State,"  they  caused  Seymour,  Sabin  &  Co.  to  subscribe 
for  and  agree  to, take  common  stock  of  the  car  company  of 
the  par  value  of  $1,500,000.  That  Seymour,  Sabin  &  Co. 
thereupon  subscribed  for  that  amount  of  the  common  stock, 
but  never  paid  therefor  any  consideration  whatever,  either  in 
money  or  property.     That  thereafter  these  persons  caused 


HOSPES  r.  NORTHWESTERN  MFTG.  &  CAR  CO.      959 

this  stock  to  be  issued  to  D.  M.  Sabin  as  trustee,  to  be  by  him 
distributed  among  them.  That  it  was  so  distributed  without 
receipt  by  him  or  the  car  compan}'-,  from  any  one,  of  any 
consideration  whatever,  but  was  given  by  the  car  company 
and  received  by  these  parties  entirely  "gratuitously."  The 
car  company  was,  at  this  time,  free  from  debt,  but  after- 
wards became  indebted  to  various  persons  for  about  $3,000.- 
000.  The  thresher  company,  incorporated  after  the  insol- 
vency and  receivership  of  the  car  company,  for  the  purpose 
of  securing  possession  of  its  assets,  property,  and  business, 
and  therewith  engaging  in  and  continuing  the  same  kind  of 
manufacturing,  prior  to  October  2"/,  1887,  purchased  and 
became  the  owner  of  unsecured  claims  against  the  car  com- 
pany, "bona  fide,  and  for  a  valuable  consideration,"  to  the  ag- 
gregate amount  of  $1,703,000.  As  creditor,  Standing  on  the 
purchase  of  these  debts,  which  were  contracted  after  the  is- 
sue of  this  "bonus"  stock,  the  thresher  company  files  this 
complaint  to  recover  the  par  value  of  the  stock  as  never  hav- 
ing been  paid  for.  The  complaint  does  not  allege  what  the 
consideration  of  these  debts  was,  nor  to  whom  originally 
owing,  nor  what  the  inter\^ener  paid  for  them,  nor  whether 
any  of  the  original  creditors  trusted  the  car  company  on  the 
faith  of  the  bonus  stock  having  been  paid  for.  Neither  does 
it  allege  that  either  the  thresher  company  or  its  assignors 
were  ignorant  of  the  bonus  issue  of  stock,  nor  that  they  or 
any  of  them  were  deceived  or  damaged  in  fact  by  such  issue, 
nor  that  the  bonus  stock  was  of  an\-  value.  Neither  is  there 
any  traversable  allegation  of  any  actual  fraud  or  intent  to 
deceive  or  injure  credit(jrs.  A  desire  to  get  something  with- 
out paying  for  it.  and  actually  getting  it.  is  not  fraudulent  or 
unlawful  if  the  donor  consents,  and  no  one  else  is  injured  by 
it;  and  the  general  allegation  that  it  was  done  "in  order  to 
evade  and  set  at  naught  the  laws  of  the  State"  of  itself 
amounts  to  nothing  but  a  mere  conclusion  of  law.  As  a 
creditors'  bill,  in  the  ordinaiy  sense,  the  complaint  is  mani- 
festly insutificient.  The  thresher  company,  however,  plants 
itself   upon   the    so-called    "trust-fund"    doctrine,    that    the 


960  LIABILITY  OF  ORIGINAL  SHAREHOLDERS" 

capital  stock  of  a  corporation  is  a  trust  fund  for  the  payment 
of  its  debts;  its  contention  being  that  such  a  "bonus"  issue  of 
stock  creates,  in  case  of  the  subsequent  insolvency  of  the  cor- 
poration, a  liability  on  part  of  the  stockholder  in  favor  of 
creditors  to  pay  for  it,  notwithstanding  his  contract  with  the 
corporation  to  the  contrary. 

This  "trust-fund"  doctrine,  commonly  called  the 
"American  doctrine,"  has  given  rise  to  much  confusion  of 
ideas  as  to  its  real  meaning,  and  much  conflict  of  decision  in 
its  application.  To  such  an  extent  has  this  been  the  case 
that  many  have  questioned  the  accuracy  of  the  phrase,  as 
well  as  doubted  the  necessity  or  expediency  of  inventing  any 
such  doctrine.  While  a  convenient  phrase  to  express  a  cer- 
tain general  idea,  it  is  not  sufficiently  precise  or  accurate  to 
constitute  a  safe  foundation  upon  which  to  build  a  system 
of  legal  rules.  The  doctrine  was  invented  by  Justice  Story 
in  Wood  V.  Dummer,  3  Mason,  308,  which  called  for  no 
such  invention,  the  fact  in  that  case  being  that  a  bank  divided 
up  two-thirds  of  its  capital  among  its  stockholders  without 
providing  funds  sufficient  to  pay  its  outstanding  bill  holders. 
Upon  old  and  familiar  principles  this  was  a  fraud  on  credi- 
tors. Evidently  all  that  the  eminent  jurist  meant  by  the  doc- 
trine was  that  corporate  property  must  be  first  appropriated 
to  the  payment  of  the  debts  of  the  company  before  there  can 
be  any  distribution  of  it  among  stockholders, — a  proposition 
that  is  sound  upon  the  plainest  principles  of  common  hon- 
esty. In  Fogg  v.  Blair,  133  U.  S.  534,  541  (10  Sup.  Ct. 
Rep.  338),  it  is  said  that  this  is  all  the  doctrine  means.  The 
expression  used  in  Wood  v.  Dummer  has,  however,  been 
taken  up  as  a  new  discovery,  which  furnished  a  solution  of 
every  question  on  the  subject.  The  phrase  that  "the  capital 
of  a  corporation  constitutes  a  trust  fund  for  the  benefit  of 
creditors"  is  misleading.  Corporate  property  is  not  held  in 
trust,  in  any  proper  sense  of  the  term.  A  trust  implies  two 
estates  or  interests — one  equitable  and  one  legal ;  one  person, 
as  trustee,  holding  the  legal  title,  while  another,  as  the  cestui 
que  trust,  has  the  beneficial  interest.     Absolute  control  and 


HOSPES  V.  NORTHWESTERN  MFTG.  &  CAR  CO.      961 

power  of  disposition  are  inconsistent  with  the  idea  of  a 
trust.  The  capital  of  a  corporation  is  its  property.  It  has 
the  whole  beneficial  interest  in  it,  as  well  as  the  legal  title. 
It  may  use  the  income  and  profits  of  it,  and  sell  and  dispose 
of  it,  the  same  as  a  natural  person.  It  is  a  trustee  for  its 
creditors  in  the  same  sense  and  to  the  same  extent  as  a 
natural  person,  but  no  further.  This  is  well  illustrated  and 
clearly  announced  in  the  case  of  Graham  v.  La  Crosse  &  M. 
R.  Co.,  102  U.  S.  148.  That  was  a  creditors'  suit  to  reach  a 
piece  of  real  estate  on  the  ground  that  it  had  been  conveyed 
by  the  corporation  fraudulently  for  a  wholly  inadequate  con- 
sideration. The  trust-fund  doctrine  was  invoked  by  a  sub- 
sequent creditor,  and  it  was  claimed  that,  as  the  trust  had 
been  violated,  the  deed  should  be  set  aside.  If  the  premise 
was  correct  that  the  corporation  held  it  in  trust  for  creditors, 
the  conclusion  was  inevitable ;  but  the  court  denied  the  pre- 
mise, saying  that  a  corporation  is  in  law  as  distinct  a  being 
as  an  individual  is,  and  is  entitled  to  hold  property  (if  not 
contrary  to  its  charter)  as  absolutely  as  an  individual  can 
hold  it.  Its  estate  is  the  same,  its  interest  is  the  same,  its 
possession  is  the  same ;  and  that  there  is  no  reason  why  the 
disposal  by  a  corporation  of  any  of  its  property  should  be 
questioned  by  subsequent  creditors  any  more  than  a  like  pro- 
posal by  an  individual ;  that  the  same  principles  of  law  apply 
to  each.  That  the  phrase  that  "the  capital  of  a  corporation 
is  a  trust  fund  for  the  payment  of  its  creditors"  is  mislead- 
ing, if  not  inaccurate,  is  illustrated  by  the  character  of  the 
actions  that  are  frequently  mistakenly  instituted  on  the 
strength  of  it.  For  example,  in  the  case  of  Wabash,  etc.,  R. 
Co.  V.  Ham,  114  U.  S.  587  (5  Sup.  Ct.  Rep.  1081),  two 
roads  had  been  consolidated,  the  new  company  acquiring  the 
property  of  the  old  ones.  A  creditor  of  one  of  the  old  com- 
panies, on  the  strength  of  the  "trust-fund"  doctrine,  claimed 
a  lien  on  its  property  in  the  hands  of  the  new  corporation. 
If  this  property  was  impressed  with  a  trust  in  favor  of  credi- 
tors in  the  hands  of  the  old  company,  it  would  logically  fol- 
low that  it  would  continue  so  in  the  hands  of  the  new  one. 


962         LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

But  the  court  denied  the  rehef,  and,  in  giving  its  construc- 
tion of  the  "trust-fund"  doctrine,  said :  "The  property  of  a 
corporation  is  doubtless  a  trust  fund  for  the  payment  of  its 
debts  in  the  sense  that  when  the  corporation  is  lawfully  dis- 
solved, and  all  its  business  wound  up,  or  when  it  is  insolvent, 
all  its  creditors  are  entitled  in  equity  to  have  their  debts  paid 
out  of  the  corporate  property  before  any  distribution  thereof 
among  the  stockholders.  It  is  also  true,  in  the  case  of  a  cor- 
poration as  in  that  of  a  natural  person,  that  any  conveyance 
of  the  property  of  the  debtor  without  authority  of  law  and  in 
fraud  of  existing  creditors  is  void."  This  is  probably  what 
is  meant  when  it  is  said  in  some  cases,  as  in  Clark  v.  Bever, 
139  U.  S.  96,  no  (11  Sup.  Ct.  Rep.  468).  that  the  capital 
of  a  corporation  is  a  trust  fund  sub  modo.  If  so,  no  one 
will  dispute  it.  But  it  means  very  little,  for  the  same  thing 
could  be  truthfully  said  of  the  property  of  an  individual  or 
a  partnership.  And  obviously  it  would  make  no  difference 
whether  the  disposition  of  the  corporate  property  is  to  a 
stranger  or  to  a  stockholder,  except  that,  of  course,  the  lat- 
ter could  not  be  an  innocent  purchaser. 

There  is  also  much  confusion  in  regard  to  what  the 
"trust-fund"  doctrine  applies.  Some  cases  seem  to  hold  that 
unpaid  subscribed  capital  is  a  trust  fund,  while  other  assets 
are  not, — that  is,  so  long  as  the  subscription  is  unpaid,  it  is 
held  in  trust  by  the  corporation,  but,  when  once  paid  in,  it 
ceases  to  be  a  trust  fund ;  while  other  cases  hold  that,  paid 
or  unpaid,  it  is  all  a  trust  fund.  The  first  seems  to  be  the 
rule  laid  down  in  Sazvyer  v.  Hoag,  17  Wall.  610,  in  which 
the  "trust-fund"  doctrine  was  first  squarely  announced  by 
that  court  with  all  the  vigor  and  force  characteristic  of  the 
great  jiu-ist  who  wrote  the  opinion.  In  that  case  a  stock- 
holder in  an  insurance  company  had  given  his  note,  as  the 
court  found  the  fact  to  be,  for  85  per  cent,  of  his  subscrip- 
tion to  the  stock  of  the  company.  After  the  company  had 
become  bankrupt,  and  the  stockholder  knew  the  fact,  he 
bought  up  a  claim  against  the  company  for  one-third  its 
face,  and  in  a  suit  by  the  assignee  in  bankruptcy  on  his  note 


HOSPES  V.  NORTHWESTERN  MFTG.  &  CAR  CO.       963 

set  up  this  claim  as  an  off-set.  That  this  would  have  been 
a  fraud  on  the  bankrupt  act,  and  at  least  a  moral  fraud  on 
policy  holders,  is  quite  apparent  without  invoking  the  "trust- 
fund"  doctrine;  and,  if  the  note  for  unpaid  stock  was  a  trust 
fund,  there  could  have  been  no  offset,  whether  the  company 
was  solvent  or  insolvent.  In  the  opinion  it  is  said  that,  if 
the  subscription  had  been  paid  by  the  note  or  otherwise,  the 
note  ceased  thereby  to  be  a  trust  fund  to  which  creditors  can 
look,  and  becomes  ordinary'  assets,  with  which  directors  may 
deal  as  they  choose.  But  in  Upton  v.  Tribilcock,  91  U.  S. 
45,  it  is  stated :  "The  capital  paid  in  and  promised  to  be 
paid  in  is  a  fund  which  the  trustees  cannot  squander  or  give 
away."  While  in  Sanger  v.  Upton,  Id.  56,  it  is  said: 
"When  debts  are  incurred  a  contract  arises  with  the  creditors 
that  it  [the  capital]  shall  not  be  withdrawn  or  applied  other- 
wise than  upon  their  demands  until  such  demands  are  satis- 
fied." And  in  the  same  connection  it  is  distinctly  stated  that 
there  is  no  difference  between  assets  paid  in  and  subscrip- 
tions ;  that  "unpaid  stock  is  as  much  a  part  of  this  pledge 
and  as  much  a  part  of  the  assets  of  the  company  as  the  cash 
which  has  been  paid  in  upon  it.  Creditors  have  the  same 
right  to  look  to  it  as  to  anything  else,  and  the  same  right  to 
insist  upon  its  payment  as  upon  the  payment  of  anv  other 
debt  due  to  the  company.  As  regards  creditors,  there  is  no 
distinction  between  such  a  demand  and  any  other  asset  ivhich 
may  form  a  part  of  the  property  and  effects  of  the  corpora- 
tion." This  language  is  quoted  and  approved  in  County  of 
Morgan  v.  Allen,  103  U.  S.  498.  508.  It  would  seem  clear 
that  this  is  the  correct  statement  of  the  law.  The  capital 
(not  the  mere  share  certificates)  means  all  the  assets,  how- 
ever invested.  If  a  subscriber  gives  his  note  for  his  stock, 
that  note  is  no  more  and  no  less  a  trust  fund  than  the  money 
would  have  been  if  he  had  paid  cash  down.  Capital  cannot 
change  from  a  trust  to  not  a  trust  by  a  mere  change  of  form. 
It  is  either  all  a  trust  or  all  not  a  trust,  and  the  "trust-fund" 
rule,  whatever  that  be,  must  apply  to  all  alike,  and  in  the 
same  way.     If  the  assets  of  a  corporation  are  given  back  to 


964  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

Stockholders,  the  result  is  the  same  as  if  the  shares  had  been" 
issued  wholly  or  partly  as  a  bonus.  The  latter  is  merely  a 
supra,  to  the  proposition  that  the  complaint  should  have 
the  capital,  voluntary  conveyances,  stock  paid  in  overvalued 
property ;  all  are  forms  of  one  and  the  same  thing,  all  reach- 
ing the  same  result  (a  disposition  of  corporate  assets), 
which  may  or  may  not  be  a  fraud  on  creditors,  depending 
on  circumstances.  This  much  being  once  settled,  the  solu- 
tion of  the  question  when  a  subsequent  creditor  can  insist  on 
payment  of  stock  issued  as  paid  up,  but  not  in  fact  paid  for, 
or  not  paid  for  at  par,  becomes,  as  we  shall  presently  see, 
comparatively  simple. 

Another  proposition  which  we  think  must  be  sound  is 
that  creditors  cannot  recover  on  the  ground  of  contract 
when  the  corporation  could  not.  Their  right  to  recover  in 
such  cases  must  rest  on  the  ground  that  the  assets  of  the 
stockholders  with  reference  to  the  corporate  capital  consti- 
tutes a  fraud  on  their  rights.  We  have  here  a  case  where 
the  contract  between  the  corporation  and  the  takers  of  the 
shares  was  specific  that  the  shares  should  not  be  paid  for. 
Therefore,  unlike  many  of  the  cases  cited,  there  is  no  ground 
for  implying  a  promise  to  pay  for  them.  The  parties  have 
explicitly  agreed  that  there  shall  be  no  such  implication,  by 
agreeing  that  the  stock  shall  not  be  paid  for.  In  such  a  case 
the  creditors  undoubtedly  may  have  rights  superior  to  the 
corporation,  but  these  rights  cannot  rest  on  the  implication 
that  the  shareholder  agreed  to  do  something  directly  con- 
trary to  his  real  agreement,  but  must  be  based  on  tort  or 
fraud,  actual  or  presumed.  In  England,  since  the  Act  of 
1867,  there  is  an  implied  contract  created  by  statute  that 
"every  share  in  any  company  shall  be  deemed  and  be  taken 
to  have  been  issued  and  to  be  held  subject  to  the  payment 
of  the  whole  amount  thereof  in  cash."  This  statutory  con- 
tract makes  every  contraiy  contract  void.  Such  a  statute 
would  be  entirely  just  to  all,  for  every  one  would  be  advised 
of  its  provisions,  and  could  conduct  himself  accordingly. 
And  in  view  of  the  fact  that  "watered"  and  "bonus"  stock 


HOSPES  V.  NORTHWESTERN  MFTG.  &  CAR  CO.      965 

is  one  of  the  greatest  abuses  connected  with  the  management 
of  modern  corporations,  such  a  law  might,  on  grounds  of 
public  policy,  be  very  desirable.  But  this  is  a  matter  for 
the  legislature,  and  not  for  the  courts.  We  have  no  such 
statute;  and,  even  if  the  law  of  1873,  under  which  the  car 
company  was  organized,  impliedly  forbids  the  issue  of  stock 
not  paid  for,  the  result  might  be  that  such  issue  would  be 
void  as  ultra  vires,  and  might  be  canceled,  but  such  a  pro- 
hibition would  not  of  itself  be  sufficient  to  create  an  implied 
contract,  contrary  to  the  actual  one,  that  the  holder  should 
pay  for  his  stock. 

It  is  well  settled  that  an  equity  in  favor  of  a  creditor 
does  not  arise  absolutely  and  in  ever)'  case  to  have  the  holder 
of  "bonus"  stock  pay  for  it  contrar}^  to  his  actual  contract 
with  the  corporation.  Thus  no  such  equity  exists  in  favor 
of  one  whose  debt  was  contracted  prior  to  the  issue,  since  he 
could  not  have  trusted  the  company  upon  the  faith  of  such 
stock.  First  Nat.  Bank  v.  Giistin,  etc..  Mining  Co.,  42  Minn. 
327  (44  N.  W.  Rep.  198)  ;  Coit  v.  Gold  Amalgamating  Co., 
119  U.  S.  343  (7  Sup.  Ct.  Rep.  231)  ;  Handley  v.  Stuts,  139 
U.  S.  417,  435  (11  Sup.  Ct.  Rep.  530).  It  does  not  exist 
in  favor  of  a  subsequent  creditor  who  has  dealt  with  the  cor- 
poration with  full  knowledge  of  the  arrangement  by  which 
the  "bonus"  stock  was  issued,  for  a  man  cannot  be  de- 
frauded by  that  which  he  knows  when  he  acts.  First  Nat. 
Bank  V.  Gustin,  etc.,  Mining  Co.,  supra.  It  has  also  been 
held  not  to  exist  where  stock  has  been  issued  and  turned  out 
at  its  full  market  value  to  pay  corporate  debts.  Clark  v. 
Bever,  snpra.  The  same  has  been  held  to  be  the  case  where 
an  active  corporation,  whose  original  capital  has  been  im- 
paired, for  the  purpose  of  recuperating  itself  issues  new 
stock,  and  sells  it  on  the  market  for  the  best  price  obtain- 
able, but  for  less  than  par  {Handley  v.  Stutz,  supra)  ;  al- 
though it  is  difficult  to  perceive,  in  the  absence  of  a  statute 
authorizing  such  a  thing  (of  which  every  one  dealing  with 
the  corporations  is  bound  to  take  notice),  any  difference  be- 
tween the  original  stock  of  a  new  corporation  and  addi- 


966  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

tional  stock  issued  by  a  "going  concern."  It  is  difficult,  if 
not  impossible,  to  explain  or  reconcile  these  cases  upon  the 
"trust-fund"  doctrine,  or,  in  the  light  of  them,  to  predicate 
the  liability  of  the  stockholder  upon  that  doctrine.  But  by 
putting  it  upon  the  ground  of  fraud,  and  applying  the  old 
and  familiar  rules  of  law  on  that  subject  to  the  peculiar 
nature  of  a  corporation  and  the  relation  which  its  stock- 
holders bear  to  it  and  to  the  public,  we  have  at  once  rational 
and  logical  ground  on  which  to  stand.  The  capital  of  a  cor- 
poration is  the  basis  of  its  credit.  It  is  a  substitute  for  the 
individual  liability  of  those  who  own  its  stock.  People  deal 
with  it  and  give  it  credit  on  the  faith  of  it.  They  have  a 
right  to  assume  that  it  has  paid-in  capital  to  the  amount 
which  it  represents  itself  as  having;  and  if  they  give  it  credit 
on  the  faith  of  that  representation,  and  if  the  representation 
is  false,  it  is  a  fraud  upon  them ;  and,  in  case  the  corporation 
becomes  insolvent,  the  law,  upon  the  plainest  principles  of 
common  justice,  says  to  the  delinquent  stockholder,  "Make 
that  representation  good  by  paying  for  your  stock."  It  cer- 
tainly cannot  require  the  invention  of  any  new  doctrine  in 
order  to  enforce  so  familiar  a  rule  of  equity.  It  is  the  mis- 
representation of  fact  in  stating  the  amount  of  capital  to  be 
greater  than  it  really  is  that  is  the  true  basis  of  the  liability 
of  the  stockholder  in  such  cases ;  and  it  follows  that  it  is  only 
those  creditors  who  have  relied,  or  who  can  fairly  be  pre- 
sumed to  have  relied,  upon  the  professed  amount  of  capital, 
in  whose  favor  the  law  will  recognize  and  enforce  an  equity 
against  the  holders  of  "bonus"  stock.  This  furnishes  a 
rational  and  uniform  rule,  to  which  familiar  principles  are 
easily  applied,  and  which  frees  the  subject  from  many  of 
the  difficulties  and  apparent  inconsistencies  into  which  the 
"trust-fund"  doctrine  has  involved  it;  and  we  think  that, 
even  when  the  trust-fund  doctrine  has  been  invoked,  the  de- 
cision in  almost  every  well-considered  case  is  readily  refer- 
able to  such  a  rule. 

It  is  urged,  however,  that,  if  fraud  be  the  basis  of  the 
stockholders'  liabilitv  in  such  cases,  the  creditor  should  af- 


HOSPES  V.  NORTHWESTERN  AIFTG.  &  CAR  CO.      967 

firmatively  allege  that  he  believed  that  the  bonus  stock  had 
been  paid  for,  and  represented  so  much  actual  capital,  and 
that  he  gave  credit  to  the  corporation  on  the  faith  of  it;  and 
it  is  also  argued  that,  while  there  may  be  a  presumption  to 
that  effect  in  the  case  of  a  subsequent  creditor,  this  is  a  mere 
presumption  of  fact,  and  that  in  pleadings  no  presumptions 
of  fact  are  indulged  in.  This  position  is  very  plausible,  and 
at  first  sight  would  seem  to  have  much  force;  but  we  think 
it  is  unsound.  Certainly  any  such  rule  of  pleading  or  proof 
would  work  very  inequitably  in  practice.  Inasmuch  as  the 
capital  of  a  corporation  is  the  basis  of  its  credit,  its  financial 
standing  and  reputation  in  the  community  has  its  source  in, 
and  is  founded  upon,  the  amount  of  its  professed  and  sup- 
posed capital,  and  every  one  who  deals  with  it  does  so  upon 
the  faith  of  that  standing  and  reputation,  although,  as  a  mat- 
ter of  fact,  he  may  have  no  personal  knowledge  of  the 
amount  of  its  professed  capital,  and  in  a  majority  of  cases 
knows  nothing  about  the  shares  of  stock  held  by  any  par- 
ticular stockholder,  or,  if  so,  what  was  paid  for  them. 
Hence,  in"  a  suit  by  such  creditor  against  the  holders  of 
"bonus"  stock,  he  could  not  truthfully  allege,  and  could  not 
affirmatively  prove,  that  he  believed  that  the  defendants' 
stock  had  been  paid  for,  and  that  he  gave  the  corporation 
credit  on  the  faith  of  it,  although,  as  a  matter  of  fact,  he 
actually  gave  the  credit  on  the  faith  of  the  financial  stand- 
ing of  the  corporation,  which  was  based  upon  its  apparent 
and  professed  amount  of  capital.  The  misrepresentation  as 
to  the  amount  of  capital  would  operate  as  a  fraud  on  such  a 
creditor  as  fully  and  effectually  as  if  he  had  personal  knowl- 
edge of  the  existence  of  the  defendants'  stock,  and  believed 
it  to  have  been  paid  for  when  he  gave  the  credit.  For  this 
reason,  among  others,  we  think  that  all  that  it  is  necessary 
to  allege  or  prove  in  that  regard  is  that  the  plaintiff  is  a  sub- 
sequent creditor;  and  that,  if  the  fact  was  that  he  dealt  with 
the  corporation  with  knowledge  of  the  arrangement  by 
which  the  "bonus"  stock  was  issued,  this  is  a  matter  of  de- 
fense.    Gogebic  Inv.  Co.  v.  Iron  Chief,  Min.  Co.,  78  Wis. 


968  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

427  (47  N.  W.  Rep.  726).  Counsel  cites  Fogg  v.  Blair, 
supra,  to  the  proposition  that  the  complainant  should  have 
stated  that  this  stock  had  some  value ;  but  that  case  is  not  in 
point,  for  the  plaintiff  there  was  a  prior  creditor;  and,  as  his 
debt  could  not  have  been  contracted  on  the  faith  of  stock  not 
then  issued,  he  could  only  maintain  his  action,  if  at  all,  by 
alleging  that  the  corporation  parted  with  something  of 
value. 

In  one  respect,  however,  we  think  the  complaint  is 
clearly  insufficient.  The  thresher  company  is  here  asking  the 
interposition  of  the  court  to  aid  in  enforcing  an  equity  in 
favor  of  creditors  against  the  stockholders  by  declaring  them 
liable  to  pay  for  this  stock  contrary  to  their  actual  contract 
with  the  corporation.  While  the  proceeding  is  not,  strictly 
speaking,  an  equitable  action,  yet  the  relief  asked  is  equitable 
in  its  nature.  Under  such  circumstances,  it  was  incumbent 
upon  the  thresher  company  to  show  its  own  equities,  and 
that  it  was  in  a  position  to  demand  such  relief.  It  was  not 
the  original  creditor  of  the  car  company,  but  the  assignee  of 
the  original  creditors.  By  that  purchase  it,  of  course,  suc- 
ceeded to  whatever  strictly  legal  rights  its  assignors  had; 
but  it  is  not  rights  of  that  kind  which  it  is  here  seeking  to 
enforce.  Under  such  circumstances,  we  think  it  was  in- 
cumbent upon  it  to  state  what  it  paid  for  the  claims,  or  at 
least  to  show  that  it  paid  a  substantial,  and  not  a  mere  nomi- 
nal consideration.  The  only  allegation  is  that  it  paid  "a  valu- 
able consideration."  This  might  have  been  only  one  dol- 
lar. It  appears  that  it  bought  the  claims  after  the  car  com- 
pany had  become  insolvent,  and  its  afifairs  were  in  the  hands 
of  a  receiver;  also  that  the  indebtedness  of  that  company 
amounted  to  about  $3,000,000,  and  that  there  were  not  cor- 
porate assets  enough  to  pay  any  considerable  part  of  it. 
The  mere  chance  of  collecting  something  out  of  the  stock- 
holders does  not  ordinarily  much  enhance  the  selling  price 
of  claims  against  an  insolvent  corporation.  If  any  person 
or  company  had  gone  to  work  and  bought  up  for  a  mere 
song  this  large  indebtedness  of  the  car  company  for  the 


HOSPESz'.  NORTHWESTERN  MFTG.  &  CAR  CO.      969 

purpose  of  speculating  on  the  liability  of  the  stockholders,  no 
court  would  grant  them  the  relief  here  prayed  for.  It  would 
say  to  them,  "We  will  not  create  and  enforce  an  equity  for 
the  benefit  of  any  such  speculation."  Counsel  for  respond- 
ent suggest  that  the  thresher  company  is  but  an  organization 
of  the  original  creditors,  who  formed  it,  and  pooled  their 
claims,  sp  as  to.save  something  out  of  the  wreck  of  the  car 
company ;  but  nothing  of  the  kind  is  alleged.  On  this  ground 
the  demurrer  should  have  been  sustained.     *     *     *- 

Order  reversed. 

GiLFiLLAN,  C.  J.,  took  uo  part. 

(Opinion  published  50  N.  W.  Rep.  11 17.) 


The  Court's  discussion  of  the  statute  of  limitations  is  omitted. 


970  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 


CHRISMAN-SAWYER  BANKING  CO. 

V. 

INDEPENDENCE  WOOL  MANUFACTURING  CO. 
In  the  Supreme  Court  of  Missouri,  1902. 

168  Missouri  Reports,  634. 

John  McCoy  subscribed  for  fifty  shares  of  stock  of  the 
Independence  Wool  Manufacturing  Co.  The  Company  an- 
nounced that  its  stock  was  fully  paid  up  in  cash.  This 
statement  was  not  true.  The  Company,  with  the  consent 
of  all  the  stockholders,  without  receiving  any  consideration, 
released  McCoy  from  his  subscription.  Subsequently  the 
Chrisman-Sawyer  Banking  Co.  became  creditors  of  the 
Independence  Company.  There  was  no  evidence  that  the 
Bank  or  their  assignee,  one  Simpson,  knew  of  the  transaction 
of  the  Independence  Company  and  McCoy  in  re  the  fifty 
shares.  The  assets  of  the  Independence  Company  being  ex- 
hausted, Simpson  seeks  to  recover  from  McCoy  the  sum  of 
$5000,  as  the  unpaid  subscription  for  the  fifty  shares  of 
stock.  ^ 

Marshall,  J. :  The  first  question  that  is  presented 
is,  whether  a  subscriber  to  stock  in  an  incorporated  company, 
that  has  not  been  fully  paid  up,  can,  by  any  device  or  ar- 
rangement with  the  company,  its  officers  or  all  of  the  other 
stockholders,  surrender  his  stock  to  the  company  and  be 
released  from  all  liability  for  the  amount  remaining,  unpaid 
on  such  stock,  and  thereby  be  relieved  of  all  responsibility 
on  account  of  such  stock  to  existing  or  subsequent  creditors 
of  the  company. 

It  is  conceded  by  all  text-writers  and  adjudications  and 
by  the  plaintiffs  herein,  that  such  a  subscriber  can  not  be  so 
released  as  to  existing  creditors,  without  their  consent.  But 
it  is  claimed  by  the  defendants  that  subsequently  creditors 


^The   facts  of  the  case  are   restated,   only  so  much   of  the   facts 
being  given  as  bears  on  the  part  of  the  opinion  republished. 


BANKING  CO.  v.  WOOL  MANUFACTURING  CO.       971 

can  not  complain  or  object,  because  when  they  gave  credit 
to  the  company  such  unpaid  subscription  did  not  constitute 
an  asset  of  the  company,  and  in  support  of  this  contention 
the  defendants  cite  Erskine  v.  Peck,  13  Mo.  App.  280,  af- 
firmed by  this  court  in  83  Mo.  465 ;  Johnson  v.  Lullman,  15 
Mo.  App.  55,  affirmed  by  this  court  in  88  Mo.  567;  Hill  v. 
Mining  Co.,  124  Mo.  167;  i  Beach  on  Private  Corp,-  sees. 
lOi  and  113;  Cook  on  Stocks  and  Stockholders,  sec.  168; 
and  cases  in  other  jurisdictions,  including  Morgan  v.  Lewis, 
46  Ohio  St.  I ;  Ins.  Co.  •;:.'.  Swigert,  135  Ills.  162;  Dunn  v. 
Howe,  96  Fed.  Rep.  163;  Graham  v.  Railroad,  102  U.  S. 
148;  Trust  Co.  V.  Abbott,  162  Mass.  148;  Steacy  ik  Railroad, 
5  Dillon  348. 

Beach  on  Private  Corporations,  vol.  I,  sec.  113,  states 
this  to  be  the  law,  and  in  support  of  the  statement  that  subse- 
quent creditors  have  no  right  to  complain,  the  author  cites 
Hollingshead  v.  Woodward,  35  Hun  410;  Johnson  v.  Lull- 
man,  15  Mo.  App.  55,  and  Erskine  v.  Peck,  13  Mo.  App.  280. 
And  this  statement  and  this  section  of  Beach  on  Private 
Corporations  is  cited,  in  Hill  v.  Mining  Co.,  124  Mo.  1.  c. 
167,   as  authority   for  that  doctrine. 

Thus  it  will  be  seen  that  Beach  relies  principally  on  the 
St.  Louis  Court  of  Appeals,  and  on  this  court,  in  Erskine  v. 
Peck  and  Johnson  v.  Lullman,  as  his  authority  for  so  stating 
the  doctrine,  and  afterwards  in  Hill  v.  Mining  Co.,  this 
court  relies  on    Beach  as  authority  for  the  doctrine. 

In  Hollingshead  v.  Woodward,  35  Hun  410,  it  ap- 
peared that  the  company  had  issued  to  the  defendant  twenty- 
five  shares  of  stock  as  a  stock  dividend  based  upon  surplus 
profits.  Afterwards  this  was  cancelled  before  the  plaintiff 
became  a  creditor.  It  was  held  that  the  defendant  was  not 
liable. 

In  Graham  v.  Railroad,  102  U.  S.  148,  it  was  held  that : 
"Where  a  corporation,  solvent  at  the  time,  and  having  no 
actual  intent  to  defraud  creditors,  disposes  of  its  lands  for  an 
inadequate  consideration  or  by  a  voluntary  conveyance,  its 
subsequent  creditors  can  not  question  the  transaction." 


972         LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

In  Morgan  v.  Lewis,  46  Ohio  St.  i,  the  defendant  sold 
a  furnace  to  the  company  and  took  pay  therefor  in  stock  of 
the  company.  The  company  became  dissatisfied  with  the 
furnace,  and  the  sale  was  rescinded,  the  company  giving 
back  the  furnace  and  taking  back  the  stock.  It  was  held 
to  be  a  good  defense  as  against  a  claim  by  subsequent  cred- 
itors for  unpaid  subscriptions  on  the  stock. 

In  Insurance  Co.  v.  Swigert,  135  Ills.  162,  the  question 
was  the  power  of  a  receiver  of  a  corporation  to  sue  for 
unpaid  subscriptions  on  stock  where  the  stockholder  by  ar- 
rangement with  the  company  had  surrendered  his  stock  and 
been  released.  It  was  held  that  as  the  company  could  not 
maintain  such  an  action,  the  receiver  (who  was  held  to 
have  no  more  power,  under  the  law  applicable  to  such  cases 
in  Illinois,  than  a  voluntary  assignee  would  have  here)  could 
not  do  so.  The  rights  of  creditors  were  not  properly  be- 
fore the  court,  and,  hence,  it  was  only  stated,  at  page  163 
of  the  opinion,  that  such  a  surrender  was  fraudulent  as  to 
existing  creditors,  but  that  as  between  the  surrendering 
stockholder  and  the  company  there  was  no  longer  any  in- 
debtedness on  account  of  subscriptions  for  stock. 

Trust  Co.  V.  Abbott,  162  Mass.  148,  was  a  bill  against 
the  executor  of  a  deceased  stockholder  to  compel  specific  per- 
formance of  a  contract  of  the  deceased  stockholder  that  upon 
his  death  the  stock  should  be  appraised  and  sold  to  the  com- 
pany. The  questions  involved  in  this  case  were  not  present 
in  that  case  at  all. 

In  Dunn  v.  Howe,  96  Fed.  Rep.  160,  it  was  held  that 
under  the  statutes  of  Maine  an  assignee  of  an  insolvent  cor- 
poration can  sue  stockholders  for  unpaid  subscriptions  on 
stock.  The  questions  under  consideration  in  the  case  at  bar 
were  not  present  in  that  case,  and  what  is  therein  said  about 
"treasury  stock,"  must  be  read  in  the  light  of  the  case  in 
judgment. 

On  the  other  hand,  it  is  contended  by  the  plaintiff 
herein  that  neither  the  coi-poration,  its  officers  nor  stock- 
holders have  any  power  to  agree  with  a  subscriber  for  stock 


BANKING  CO.  v.  WOOL  MANUFACTURING  CO.       973 

that  his  subscription  be  cancelled,  unless  such  power  is  ex- 
pressly given  to  them  by  charter  or  statute,  and  that  unpaid 
stock  subscriptions  constitute  assets  of  the  corporation  which 
all  creditors,  existing  or  subsequent  to  the  time  of  such  at- 
tempted cancellation,  have  a  right  to  look  to  for  the  pay- 
ment of  their  debts,  and  that  this  right  exists  whether  the 
creditor  knew  the  fact  that  there  were  any  such  unpaid  stock 
subscriptions  when  he  extended  credit  to  the  company  or 
not,  the  only  exceptions  to  this  rule  being  the  right  of  the 
company  to  protect  itself  by  forfeiting  stock  where  the 
subscriber  fails  to  pay  for  it,  and  in  cases  of  a  dispute  be- 
tween the  company  and  the  stockholder  as  to  his  liability, 
the  matter  may  be  compromised  and  the  stock  surrendered, 
if  done  in  good  faith.  As  to  such  exceptions,  see  Morawetz 
on  Priv.  Cor.  p.,  sees.  125  and  114,  and  2  Thompson  on  Law 
of  Corp.,  sec.  1553,  and  see  also  sec.  961.  Revised  Statutes 
1899,  which  provides  substantially  the  same  thing.  In  sup- 
port of  the  general  rule  stated,  the  plaintiff  aptly  cites  the 
following  authorities :  i  Morawetz  on  Private  Corporations, 
sec.  109,  et  seq ;  2  Ibid.,  sec.  824,  et  seq. ;  2  Thompson's  Com. 
on  Law  of  Corporations,  sec.  1151,  et  seq. ;  Insurance  Co.  v. 
Floyd.  74  Mo.  286;  Nichols  v.  Stevens,  123  Mo.  96;  Olles- 
heimer  v.  Mfg.  Co.,  44  Mo.  App.  172;  Wells  &  Co.  v. 
Thompson  Mfg.  Co.,  54  Mo.  App.  41 ;  Shickle  v.  Watts, 
94  Mo.  410;  Rawhide  Co.  v.  Hill,  ■/2  Mo.  App.  142; 
Skrainka  7'.  Allen,  7  ]Mo.  App.  434;  s.  c,  76  Mo.  384;  Gill  v. 
Balis,  yz  Mo.  424;  Ramsey  v.  Mfg.  Co.,  116  Mo.  313 ;  State 
ex  rel.  v.  McGrath.  86  Mo.  239;  Thompson  v.  Lake,  19  Nev. 
103  ;  Hamor  ?•'.  Eng.  Co..  84  Fed.  ?Q2  ;  Putnam  z:  Hutchison 

45  Pac.  Rep.  931  ;  s.  c,  4  Kans.  App.  273  ;  Allibone  v.  Hager, 

46  Pa.  St.  48 ;  Railroad  v.  Bowser,  48  Pa.  St.  29 ;  Ailing  v. 
Wenzel,  i^^  111.  264;  Singer  z'.  Given.  61  Iowa  93  ;  Railroad 
V.  Eastman,  34  N.  H.  140;  Upton  v.  Tribilcock,  91  U.  S. 
45 ;  Crandall  z'.  Lincoln,  52  Conn.  y;^. 

To  these  cases  it  is  only  necessary  to  add  Camden  v. 
Stuart,  144  U.  S.  1.  c.  113-114,  and  Van  Clcvc  ;:•.  Berkey. 
143  Mo.  109. 


974  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

111  the  case  last  cited,  Brace^  J.,  speaking  for  this  court, 
in  an  elaborate  and  exhaustive  opinion,  reviewed  the  cases 
in  this  State  and  in  other  jurisdictions,  and  concluded  as 
follows : 

"Upon  a  review  of  all  the  cases  decided  by  the  appellate 
courts  of  this  State  since  the  adoption  of  the  Constitution  of 
1875,  the  ruling  in  all  of  which  will  be  found  to  be  in  har- 
mony, it  is  impossible  to  escape  the  conviction  that  in  this 
State,  whatever  may- be  the  case  in  some  of  the  other  States, 
the  American  Trust  Doctrine,  as  suggested  by  Mr.  Justice 
Harlan,  has  indeed  been  'reinforced'  by  its  Constitution  and 
statutes ;  and  that  the  proposition  that  the  stock  of  a  corpora- 
tion must  be  paid  for  'in  meal  or  in  malt,'  in  money  or  in 
money's  value,  is  not  a  mere  figure  of  speech,  but  really  has 
the  significance  of  its  terms.  It  may  be  paid  for  in  property, 
but  in  such  case  the  property  must  be  the  fair  equivalent  in 
value  to  the  par  value  of  the  stock  issued  therefor;  that  it  is 
the  duty  of  the  stockholders  to  see  that  it  possesses  such 
value;  that  when  a  corporation  is  sent  forth  into  the  com- 
mercial world,  accredited  by  them  as  possessed  of  a  capital 
in  money,  or  its  equivalent,  in  property,  equal  to  the  par 
value  of  its  capital  stock,  every  person  dealing  with  it,  unless 
otherwise  advised,  has  a  right  to  extend  credit  to  it  on  the 
faith  of  the  fact  that  its  capital  stock  has  been  so  paid  and 
that  the  money  or  its  equivalent  in  property  will  be  forth- 
coming to  respond  to  his  legitimate  demands.  In  short,  that 
it  is  the  duty  of  the  stockholder,  and  not  of  the  creditor,  to 
see  that  it  is  so  paid ;  hence,  the  inquiry  in  a  case  between  the 
creditor  and  a  stockholder  when  property  has  been  paid  in 
for  the  capital  stock  of  a  corporation,  is  not  whether  the 
stockholder  believed  or  had  reason  to  believe  that  the  prop- 
erty was  equal  in  value  to  the  par  value  of  the  capital  stock; 
but  whether,  in  point  of  fact,  it  was  such  equivalent." 

In  the  opinion  just  referred  to,  the  cases  of  Insurance 


^ 


'The  rest  of  the  opinion,  dealing  with  a  question  under  the  Mis- 
souri statute  of  limitations  and  with  whether  Simpson  was  a  bona  fide 
holder  of  the  claim,  is  omitted. 


BANKING  CO.  v.  WOOL  MANUFACTURING  CO.       975 

Co.  V.  Floyd,  74  Mo.  286 ;  Gill  v.  Balis,  72  Mo.  424 ;  Ramsey 
V.  Mfg.  Co.,  116  Mo.  313,  and  Upton  v.  Tribilcock,  91  U. 
S.  45,  which  hold  that  a  corporation  can  not  make  an  ar- 
rangement with  any  of  its  stockholders  by  which  they  are 
to  be  released  from  the  payment  of  their  stock  subscribed,  or 
any  part  thereof,  so  as  to  affect  the  rights  of  the  creditors, 
are  cited,  followed,  approved  and  that  doctrine  firmly  re- 
stated. The  cases  of  Erskine  v.  Peck  and  Johnson  v.  Lull- 
man,  were  distinguished  in  the  Upton  case,  supra,  and  over- 
ruled as  far  as  it  was  possible  for  that  court  to  do  so,  and 
the  contrary  doctrine  announced  by  the  St.  Louis  Court  of 
Appeals  in  Ollesheimer  v.  Mfg.  Co.,  44  Mo.  App.  172,  and  in 
Wells  &  Co.  V.  Thompson  Mfg.  Co.,  54  M.  App.  41,  was 
approved. 

So  that  the  law  is  now  well  settled  in  Missouri,  as  well 
as  by  the  weight  of  authority  in  America,  that  unpaid  stock 
subscriptions  constitute  an  asset  of  an  incorporated  com- 
pany, which  all  creditors,  without  regard  to  when  their  debts 
were  contracted,  have  a  right  to  look  to  and  which  can  not 
be  extinguished,  released,  given  away,  wiped  out  or  im- 
paired by  any  act  of  the  corporation  or  the  stockholder  to 
the  injury  of  the  creditor  except  by  his  consent. 

This  is  not  only  the  legal  rule  but  it  conforms  also  to  the 
demands  of  business  integrity  and  honesty  and  is  the  logical 
sequence  of  the  voluntary  act  of  the  stockholder  flowing 
from  his  subscription.  The  statutes  of  this  State  authorize 
the  formation  of  a  business  corporation — such  as  this  com- 
pany— only  upon  condition  that  all  of  the  stock  has  been 
bona  fide  subscribed  and  that  at  least  fifty  per  cent  thereof 
has  been  paid  up  in  lawful  money  of  the  United  States  (or 
in  its  equivalent).  This  is  the  statement  and  representation 
that  is  held  out  to  the  world  by  the  incorporators,  and  their 
transferees,  of  every  incorporated  company.  If  the  incor- 
porators or  stockholders  could  be  allowed,  as  soon  as  the 
incorporation  was  completed,  to  sell  out  their  stock  to  the 
company,  and  thereby  escape  liability  for  unpaid  subscrip- 
tions, or  in  case  the  stock  was  fully  paid,  to  receive  back 


976  LIABILITY  OF  ORIGINAL  SHAREHOLDERS 

from  the  company  the  amount  paid  in,  and  to  turn  back  to 
the  company  the  stock  subscribed,  the  doors  for  great  frauds 
upon  the  creditors  would  be  thrown  wide  open,  and  the  con- 
sequences would  not  only  be  disastrous  to  creditors,  but 
would  also  be  fatal  to  the  corporations  themselves,  inasmuch 
as  no  one  would  deal  with  corporations  under  such  con- 
ditions. 

The  statutes  afford  ample,  honest  and  sufficient 
methods  for  reducing  the  stock  of  an  incorporated  com- 
pany, and  the  rights  of  creditors  as  well  as  the  interests  of 
such  companies  are  fully  protected.  Such  a  proceeding  as 
was  resorted  to  in  this  case  is  wholly  without  legal  au- 
thority or  protection.  Either  the  whole  stock  was  only  paid 
up  to  the  extent  of  eighty  per  cent,  or  else  there  were  one 
hundred  shares  subscribed  for  (of  which  the  defendant 
McCoy  had  fifty)  upon  which  not  one  cent  was  paid  to  the 
company  by  the  subscribers,  and  for  which  the  company  paid 
the  subscribers  not  one  cent  when  it  resolved  to  buy  them 
back  at  one  hundred  dollars  a  share,  and  to  make  them 
"treasury  stock." 

The  parties  have  treated  these  shares  as  absolutely  un- 
paid shares,  and  they  can  not  complain  if  the  consequences 
of  such  a  position  are  visited  upon  them.  It  is  a  legal 
solecism  to  say  that  any  business  corporation,  under  our  law, 
can  become  the  owner  of  shares  in  such  corporation,  which 
are  wholly  unpaid  for.  At  least  fifty  per  cent  was  paid 
thereon  before  the  company  was  incorporated,  or  else  the 
incorporators  did  not  tell  the  truth,  and  the  incorporation 
was  a  fraud  upon  the  State.  But  it  has  passed  into  a  legal 
truism  in  Missouri  that  so  far  as  creditors  are  concerned, 
unpaid  stock  subscriptions  constitute  an  asset  of  the  corpora- 
tion that  can  be  subjected  to  the  payment  of  the  debts  of 
the  corporation.  The  American  doctrine  is  that  such  unpaid 
stock  subscriptions  constitute,  in  equity,  a  trust  fund  in  the 
hands  of  the  directors  of  the  corporation  for  the  payment 
of  debts.  Strictly  and  technically,  of  course  such  unpaid 
subscriptions  are  not  a  trust  fund,  but  are  rather  an  asset 


BANKING  CO.  v.  WOOL  MANUFACTURING  CO.       977 

of  the  corporation  which  it  would  be  a  fraud  upon  the  cred- 
itors for  the  directors  to  dispose  of  in  any  manner  or  for 
any  purpose  except  for  the  payment  of  the  debts  of  the 
corporation.  And  this  being  true  the  courts  will  undo  the 
fraudulent  transfer  and  gather  in  the  asset  for  the  benefit 
of  the  creditors. 

From  these  considerations  it  follows  that  the  instruetion 
given  by  the  court  to  the  effect  that  if  the  stock  subscription 
sued  on  was  cancelled  and  surrendered  by  the  defendant 
with  the  consent  of  all  the  stockholders  of  the  company 
prior  to  the  time  the  debt  in  suit  was  contracted,  the  plaintiff 
can  not  recover,  was  erroneous,  and  that  on  the  contrary  the 
defendant  is  liable  to  the  creditors  of  the  company,  without 
regard  to  when  their  debts  were  contracted,  for  the  unpaid 
subscription  for  such  stock,  and  that  the  attempted  sur- 
render and  cancellation  of  the  subscription  and  the  purchase 
of  such  stock  by  the  company  as  ''treasury  stock,"  is  void, 
and  of  no  more  effect  than  if  no  such  thing  had  ever  been 
attempted,  and  that  the  plaintiff  is  entitled  to  a  judgment 
unless  some  of  the  other  defenses  are  well  founded.^ 

Affirmed.^ 


"The  rest  of  the  opinion  dealing  with  a  question  under  the  Missouri 
statute  of  Hmitations  is  omitted. 

^Compare:  Hill  v.  Silvcy,  8i  Ga.  500,  1888.  (The  charter  of  a 
bank  provided  the  sum  of  $200,000  as  the  minimum  amount  of  capital 
which  would  authorize  it  to  do  business,  and  that  subscribers  for  stock 
should  be  liable  for  the  debts  of  the  bank  to  the  extent  of  the  unpaid 
stock  subscribed  for  by  them,  in  proportion  to  the  number  of  shares 
held  by  them.  There  was  a  stock  subscription  list  amounting  to 
$408,200,  and  an  organization  of  the  bank  in  which  2,400  shares  of  stock 
were  represented.  In  pursuance  of  regular  calls,  the  subscribers  rep- 
resented in  the  organization  paid  fifty  per  cent,  on  their  subscribed 
stock.  On  June  30,  1873,  a  return  was  made  to  the  governor, 
under  section  1467  of  the  code,  representing  the  capital  stock  paid  in 
as  $140,340,  and  containing  no  statement  of  the  capital  stock  subscribed. 
No  action  was  taken  definitely  fixing  any  amount  as  the  capital  stock, 
until  January,  1874,  when  the  stockholders,  by  resolution,  declared  that 
it  was  thought  best  to  reduce  the  stock  to  full  paid  up  stock,  that  certi- 
ficates of  stock  be  issued  for  the  amount  actually  paid  in,  and  that  the 
capital  stock  and  subscriptions  be  reduced  to  the  amounts  actually  paid 
in;  providing  further  that  the  books  should  be  opened  for  additional 
subscriptions  of  full  paid  up  stock,  to  remain  open  until  the  whole  capi- 
tal stock  subscribed  should  reach  the  sum  of  $400,000.  No  certificates 
of  stock  were  issued  until  after  this  action.  Other  returns  to  the  gov- 
ernor were  made  from  year  to  year,  showing  the  amount  of  capital 
stock  as  gradually  increasing  to  $186,300,  then  decreasing  to  $160,000  on 
December  31,  1880,  when  the  last  return  was  made.  The  bank,  becom- 
ing insolvent  in  1881,  made  an  assignment  of  all  its  property,  rights, 


978 


LIABILITY  OF  ORIGINAL  SHAREHOLDERS 


etc.,  for  the  benefit  of  its  creditors.  Under  a  bill  filed  by  the  State  of 
Georgia  in  behalf  of  itself  and  other  creditors,  the  assignees  were 
appointed  receivers  of  all  the  property,  etc.,  assigned  to  them.  They 
brought  a  bill  against  the  stockholders  to  collect  the  remaining  fifty 
per  cent,  on  their  subscriptions,  alleging  that  the  resolutions  above 
referred  to  were  void,  and  that  the  unpaid  fifty  per  cent,  were  assets 
of  the  bank  w)hich  passed  by  the  deed  of  assignment,  and  were  a  fund 
in  equity  to  be  collected  and  applied  to  the  payment  of  the  bank's 
debts."  Bill  dismissed.  Gustis,  J. :  "In  later  years,  another  class  of 
cases  has  arisen  in  which,  after  the  capital  stock  has  been  subscribed, 
the  fund  representing  it  has  been  reduced  by  arrangements  among  the 
stockholders,  either  to  treat  the  whole  subscription  as  paid,  when  part 
only  has  been,  to  reduce  the  capital  stock  after  subscription,  or  other 
agreements  of  like  character ;  and  the  question  has  arisen  in  these 
cases  whether  as  to  future  creditors  the  same  absolute  liability  attaches, 
or  whether  certain  qualifications  are  to  be  made  according  to  the  cir- 
cumstances of  each  case.  *  *  *  It  must  be  apparent  that  the 
stock  as  originally  shown  by  the  subscription  list,  was  never  held  out 
to  the  world  as  the  stock  of  the  corporation,  and  that  the  creditors  did 
not  rely  nor  will  they  be  legally  presumed  to  have  relied  thereon.  No 
creditor  has  by  any  pleadings  or  evidence  sought  to  set  up  any  such 
claim ;  they  rest  on  the  naked  fact  that  the  subscription  was  made. 
To  the  extent  of  the  two  hundred  thousand  dollars,  the  minimum 
capital  stock  allowed  by  the  charter  upon  which  business  could  be 
commenced,  they  certainly  had  a  right  to  presume  that  the  stock  had 
been  subscribed ;  the  fact  alone  of  the  commencement  of  business 
created  that  presumption,  and  to  that  extent  we  have  no  doubt  that  the 
stockholders  were  correctly  held  liable.  But  beyond  that  amount  no 
such  presumption  arises.  No  act,  no  statement  of  the  corporation,  is 
shown  by  which  it  has  ever  in  any  manner  sought  to  mislead  the 
public  as  to  the  real  amount  of  its  capital  stock.") 


APPENDIX   A. 


PENNSYLVANIA  LEGISLATURE  ON 
ASSOCIATIONS. 


SECTION    I.— ASSOCIATIONS    ORGANIZED    ON 
THE   NON-REPRESENTATIVE  PRINCIPLE. 


LIMITED  PARTNERSHIPS. 

ACT  OF  MARCH  21,    1836.^ 

Section  i.  Limited  partnerships  for  the  transaction  of 
any  agricultural,  mercantile,  mechanical,  mining  and  trans- 
porting of  coal,  or  manufacturing  business,  within  this  state, 
may  be  formed  by  two  or  more  persons,  upon  the  terms, 
with  the  rights  and  powers,  and  subject  to  the  conditions 
and  liabilities  herein  prescribed;  but  the  provisions  of  this 
act  shall  not  be  construed  to  authorize  any  such  partner- 
ship for  the  purpose  of  banking  or  making  insurance. 

Section  2.  Such  partnerships  may  consist  of  one  or 
more  persons,  who  shall  be  called  general  partners,  and  who 
shall  be  jointly  and  severally  responsible  as  general  partners 
now  are  by  law,  and  of  one  or  more  persons  who  shall  con- 
tribute in  actual  cash  payments,-  a  specific  sum  as  capital  to 
the  common  stock,  who  shall  be  called  special  partners,  and 
who  shall  not  be  liable  for  the  debts  of  the  partnership  be- 
yond the  fund  so  contributed  by  him  or  them  to  the  capital. 

Section  3.  The  general  partners  only  shall  be  author- 
ized to  transact  business  and  sign  for  the  partnership,  and 
to  bind  the  same. 


*P.  L.  143. 

^  These  payments  may  now  be  made  in  goods  or  merchandise.     See 
Act  of  1865,  infra,  page  8. 


2  PENNSYLVANIA  ASSOCIATION  ACTS 

Section  4.  The  persons  desirous  of  forming  such 
partnership  shall  make  and  severally  sign  a  certificate,  which 
shall  contain : — 

I.  The  name  or  firm  under  which  such  partnership  is 
to  be  conducted. 

II.  The  general  nature  of  the  business  intended  to  be 
transacted. 

III.  The  names  of  all  the  general  and  special  partners 
interested  therein,  distinguishing  which  are  general  and 
which  are  special  partners,^  and  their  respective  places  of 
residence. 

IV.  The  amount  of  capital  which  each  special  partner 
shall  have  contributed  to  the  common  stock. 

V.  The  period  at  which  the  partnership  is  to  com- 
mence, and  the  period  at  which  it  will  terminate. 

Section  5.  The  certificate  shall  be  acknowledged  by 
the  several  persons  signing  the  same,  in  the  manner,  and 
before  the  same  persons,  that  deeds  are  now  acknowledged, 
and  the  said  acknowledgment  shall  be  certified  in  the  same 
manner  as  the  acknowledgment  of  deeds  are  now  certified. 

Section  6.  The  certificate  so  acknowledged  and  certi- 
fied, shall  be  recorded  and  filed  in  the  office  of  the  recorder 
of  deeds  of  the  proper  county,  in  which  the  principal  place 
of  business  of  the  partnership  shall  be  situated,  and  shall 
also  be  recorded  by  him  at  large,  in  a  book  to  be  kept  for 
that  purpose  open  to  public  inspection:  If  the  partnership 
shall  have  places  of  business  situated  in  different  counties,  a 
transcript  of  the  certificate  and  of  the  acknowledgment 
thereof,  duly  certified  by  the  recorder  in  whose  office  it  shall 
be  filed,  and  under  his  official  seal,  shall  be  filed  and  re- 
corded in  like  manner  in  the  office  of  the  recorder  of  every 
such  county. 

Section  7.  At  the  time  of  filing  the  original  certifi- 
cate, with  the  evidence  of  the  acknowledgment  thereof,  as 
before  directed,  an  affidavit  of  one  or  more  of  the  general 


See,  however,  Act  of-iSsS,  section  i,  infra,  page  5. 


LBIITED  PARTNERSHIPS  3 

partners  shall  also  be  filed  in  the  same  office,  stating  the 
sums  specified  in  the  certificate  to  have  been  contributed  by 
each  of  the  special  partners  to  the  common  stock,  and  to 
have  been  actually,  and  in  good  faith,  paid  in  cash. 

Section  8.  No  such  partnership  shall  be  deemed  to 
have  been  formed  until  a  certificate  shall  have  been  made, 
acknowledged  and  filed,  and  recorded,  nor  until  an  affidavit 
shall  have  been  filed  as  above  directed;  and  if  any  false 
statement  be  made  in  such  certificate  or  affidavit,  all  the 
persons  interested  in  such  partnership  shall  be  liable  for  all 
the  engagements  thereof,  as  general  partners. 

Section  9.  The  partners  shall  publish  the  terms  of  the 
partnership,  when  registered,  for  at  least  six  weeks  imme- 
diately after  such  registry,  in  two  newspapers,  to  be  desig- 
nated by  the  recorder  of  deeds  of-  the  county  in  which  such 
registry  shall  be  made,  and  to  be  published  in  the  county  or 
counties  in  which  their  business  shall  be  carried  on ;  and  if 
such  publication  be  not  made,  the  partnership  shall  be 
deemed  general. 

Section  10.  Affidavits  of  the  publication  of  such  no- 
tice by  the  printers  of  the  newspapers  in  which  the  same 
shall  be  published,  may  be  filed  with  the  recorder,  directing 
the  same,  and  shall  be  evidence  of  the  facts  therein  con- 
tained. 

Section  ii.  Every  renewal  or  continuance  of  such 
partnership  beyond  the  time  originally  fixed  for  its  dura- 
tion, shall  be  certified,  acknowledged  and  recorded,  and  an 
affidavit  of  a  general  partner  be  made  and  filed,  and  notice 
be  given  in  the  manner  herein  required  for  its  original 
formation,  and  every  such  partnership  which  shall  be 
otherwise  renewed  or  continued,  shall  be  deemed  a  general 
partnership. 

Section  12,  Every  alteration  which  shall  be  made  in 
the  names  of  the  partners,  in  the  nature  of  the  business,  or 
in  the  capital  or  shares  thereof,  or  in  any  other  matter  speci- 
fied in  the  original  certificate,  shall  be  deemed  a  dissolution 
of  the  partnership,  and  every  such  partnership  which  shall 


4  PENNSYLVANIA  ASSOCIATION  ACTS 

in  any  manner  be  carried  on  after  any  such  alteration  shall 
have  been  made,  shall  be  deemed  a  general  partnership, 
unless  renewed  as  a  special  partnership,  according  to  the 
provisions  of  the  last  section. 

Section  13.  The  business  of  the  partnership  shall  be 
conducted  under  a  firm,  in  which  the  names  of  the  general 
partners  only  shall  be  inserted,  without  the  addition  of  the 
word  "Company,"'*  or  any  other  general  term,  and  if  the 
name  of  any  special  partner  shall  be  used  in  such  firm,  with 
his  privity,  he  shall  be  deemed  a  general  partner. 

Section  14.  Suits  in  relation  to  the  business  of  the 
partnership  may  be  brought  and  conducted  by  and  against 
the  general  partners,  in  the  same  manner  as  if  there  were 
no  special  partners. 

Section  15.  No  part  of  the  sum  which  any  special 
partner  shall  have  contributed  to  the  capital  stock,  shall  be 
liable  for  any  debts  previously  contracted  by  the  general 
partners,  nor  shall  any  part  of  such  sum  be  withdrawn  by 
him,  or  paid  or  transferred  to  him  in  the  shape  of  dividends, 
profits,  or  otherwise,  at  any  time  during  the  continuance  of 
the  partnership;  but  any  partner  may  annually  receive  law- 
ful interest  on  the  sum  so  contributed  by  him,  if  the  pay- 
ment of  such  interest  shall  not  reduce  the  original  amount 
of  such  capital,  and  if  after  the  payment  of  such  interest, 
any  profits  shall  remain  to  be  divided,  he  may  also  receive 
his  portion  of  such  profits. 

Section  16.  If  it  shall  appear  that  by  the  payment  of 
interest  or  profits  to  any  special  partner,  the  original  capi- 
tal has  been  reduced,  the  partner  receiving  the  same  shall  be 
bound  to  restore  the  amount  necessary  to  make  good  his 
share  of  capital,  with  interest. 

Section  17.  A  special  partner  may,  from  time  to  time, 
examine  into  the  state  and  progress  of  the  partnership  con- 
cerns, and  may  advise  as  to  their  management,  but  he  shall 
not  transact  any  business  on  account  of  the  partnership,  nor 


*  See,  however,  Act  of  1865,  section  2,  and  1868,  section   i,  infra, 
page  9. 


LIMITED  PARTNERSHIPS  5 

be  employed  for  that  purpose  as  agent,  attorney  or  other- 
wise; if  he  shall  interfere  contrary  to  these  provisions,  he 
shall  be  deemed  a  general  partner. 

Section  i8.  The  general  partners  shall  be  liable  to  ac- 
count to  each  other  and  to  the  special  partners,  for  the 
management  of  their  concern,  both  in  law  and  equity,  as 
other  partners  now  are-  by  law. 

Section  19.  Every  partner  who  shall  be  guilty  of  any 
fraud  in  the  affairs  of  the  partnership,  shall  be  liable  civilly 
to  the  party  injured,  to  the  extent  of  his  damage. 

Section  20.  Every  sale,  assignment,  or  transfer  of  any 
of  the  property  or  effects  of  such  partnership,  made  by  such 
partnership  when  insolvent,  or  in  contemplation  of  insolv- 
ency, or  after  or  in  contemplation  of  the  insolvency  of  an}- 
partner,  with  the  intent  of  giving  a  preference  to  any  credi- 
tor of  such  partnership  or  insolvent  partner  over  other  cred- 
itors of  such  partnership,  and  every  judgment  confessed, 
lien  created,  or  security  given  by  any  such  partner  under 
the  like  circumstances  and  with  the  like  intent,  shall  be  void 
as  against  the  creditors  of  the  partnership. 

Section  21.  Every  such  sale,  assignment,  or  transfer 
of  any  of  the  property  or  effects  of  the  general  or  special 
partner,  made  by  such  general  or  special  partner  when  in- 
solvent, or  in  contemplation  of  insolvency,  or  after  or  in 
contemplation  of  the  insolvency  of  the  partnership,  with  the 
intent  of  giving  to  any  creditor  of  his  own  or  of  the  part- 
nership a  preference  over  creditors  of  the  partnership,  and 
ever)'  judgment  confessed,  lien  created,  or  security  given  by 
any  such  partner  under  the  like  circumstances  and  with  the 
like  intent,  shall  be  void  as  against  the  creditors  of  the  part- 
nership. 

Section  22.  Every  special  partner  who  shall  violate 
any  provision  of  the  two  last  preceding  sections,  or  who 
shall  concur  in  or  assent  to  any  such  violation  by  the  part- 
nership, or  by  any  individual  partner,  shall  be  liable  as  a 
general  partner. 

Section  23.  In  case  of  the  insolvency  or  bankruptcy 


6  PENNSYLVANIA  ASSOCIATION  ACTS 

of  the  partnership,  no  special  partner  shall,  under  any  cir- 
cumstances, be  allowed  to  claim  as  a  creditor,  until  the 
claims  of  all  the  other  creditors  of  the  partnership  shall  be 
satisfied. 

Section  24.  No  dissolution  of  such  partnership  by  the 
acts  of  the  parties,  shall  take  place  previous  to  the  time 
specified  in  the  certificate  of  its  formation,  or  in  the  certifi- 
cate of  its  renewal,  until  a  notice  of  such  dissolution  shall 
have  been  filed  and  recorded  in  the  recorder's  office  in  which 
the  original  certificate  was  recorded,  and  published  once  in 
each  week  for  four  weeks,  in  a  newspaper  printed  in  each 
of  the  counties  where  the  partnership  may  have  places  of 
business. 


ACT    OF    APRIL    1 6,    1838.^ 

A  general  partner  in  any  limited  partnership  may,  with 
the  assent  in  writing  of  his  partner,  by  deed  duly  acknowl- 
edged and  recorded,  or  by  last  will  and  testament,  in  writ- 
ing, sell,  assign,  dispose  of  or  bequeath  his  interest  in  such 
limited  partnership ;  and  when  such  general  partner  dies 
without  having  disposed  of  his  interest  in  such  limited  part- 
nership, his  administrator  nv  executor  may,  in  like  manner, 
sell,  assign  and  transfer  his  interest  therein  for  the  benefit 
of  his  estate ;  and  on  every  such  sale,  transfer  or  bequest,  a 
corresponding  alteration  shall  be  made  in  the  name  or  firm 
under  which  the  business  of  such  partnership  is  conducted, 
and  the  same  shall  be  forthwith  acknowledged,  certified,  re- 
corded and  published,  in  the  same  manner  as  is  provided  by 
law  in  the  case  of  the  original  formation  of  the  partnership. 

A  special  partner,  with  the  assent  of  his  partner,  in 
writing,  first  had  and  obtained,  may  sell  or  assign  his  in- 
terest in  a  limited  partnership  without  causing  thereby  a 
dissolution  of  the  partnership. 

The  insolvency  of  any  special  partner  shall  not  cause 

'  P.  L.  689,  691. 


LIMITED  PARTXERSHIPS  7 

a  dissolution  of  the  limited  partnership,  but  his  interest 
therein  shall  be  sold  by  his  assignees  for  the  benefit  of  his 
creditors. 

When  any  special  partner  shall  die,  without  having 
disposed  of  his  interest  in  the  limited  partnership,  his  ex- 
ecutor or  administrator  may  either  continue  his  interest 
therein  for  its  unexpired  term,  for  the  benefit  of  his  estate, 
or  may  sell  the  same  at  public  auction,  under  the  dii:«ction 
of  the  Orphans'  Court  of  the  county  in  which  the  principal 
place  of  business  of  such  partnership  may  be,  in  the  same 
manner  as  the  estates  of  intestates  are  now  by  law  sold; 
testamentary  dispositions,  in  writing,  of  the  interest  of 
special  partners  may  also  be  made;  the  decease  of  special 
partners  shall  not  dissolve  such  limited  partnership,  unless 
by  the  agreement  between  the  parties  it  is  provided  that 
such  decease  shall  have  that -effect. 

Every  alteration  in  such  limited  partnership,  according 
to  the  provisions  of  this  resolve,  shall  be  notified  to  the 
general  partner,  and  shall  be  duly  acknowledged,  certified 
and  recorded,  as  in  the  case  of  the  original  formation  of 
such  partnership. 


ACT   OF   APRIL   21,    1858.'^ 

Section  i.  The  terms  of  the  partnership  required  to 
be  published  by  the  ninth  section  of  the  act  to  which  this  is 
a  further  supplement  [Act  of  March  21st,  1836]  shall  con- 
sist of — 

I.  The  name  of  the  firm  under  which  such  partner- 
ship shall  be  conducted. 

II.  The  general  nature  of  the  business  intended  to  be 
transacted. 

III.  The  names  of  the  general  partners,  and  their  re- 
spective places  of  residence. 

IV.  The  aggregate  amount  of  capital  contributed  by 
the  special  partners  to  the  common  stock. 

'  P.  L.  383. 


8  PENNSYLVANIA  ASSOCIATION  ACTS 

V.  The  period  at  which  the  partnership  is  to  com- 
mence, and  the  period  at  which  it  will  terminate. 

Section  2.  The  consent  of  the  partners  to  a  sale 
or  transfer,  by  either  the  general  or  special  partners,  of 
their  respective  interests  in  the  partnership,  in  pursuance 
of  the  resolution  of  the  sixteenth  of  April,  one  thousand 
eight  hundred  and  thirty-eight,  may  be  given  in  advance, 
either  in  the  original  articles  of  partnership  or  other  like 
instrument;  and  a  sale  or  transfer  of  any  part  or  share  of 
the  interest  in  the  firm  of  any  partner,  if  made  in  pursuance 
of  the  articles  of  copartnership,  or  previously  expressed 
consent  of  the  partners  as  aforesaid,  shall  be  equally 
valid  as  a  sale  of  the  whole  interest  of  any  one  or  more 
of  the  partners;  and  it  shall  further  be  lawful  for  the  gen- 
eral partner  or  partners,  or  either  of  them,  to  purchase  part 
or  the  whole  of  the  interest  or  shares  of  one  or  more  of  the 
special  partners. 

Section  3.  The  capital  of  the  firm  may  be  in- 
creased either  by  taking  in  new  special  partners,  or  new 
subscriptions  of  capital  from  the  partners  previously  in  the 
firm ;  such  increase  being  made  in  pursuance  of  the  consent 
of  the  partners,  as  expressed  in  the  original  articles  of 
partnership,  or  in  any  subsequent  instrument  of  writing. 

Section  4.  Ever\^  such  increase  of  capital  shall  be 
duly  acknowledged,  certified  and  recorded ;  but  no  neg- 
lect in  recording  the  certificate  of  any  such  increase  of 
capital,  or  of  any  sale  or  transfer  of  the  interests  or  shares 
of  the  special  partners,  or  any  of  them,  shall  be  construed 
to  operate  as  a  dissolution  of  the  firm,  or  to  make  the  spe- 
cial partners  liable  as  general  partners. 


act  of  march  30,  1865.''' 

Section  i.  It  shall  and  may  be  lawful  for  any  special 
partner  to  make  his  contribution  to  the  common  stock  of  any 

'  P.  L.  46. 


LIMITED  PARTXERSHIPS  9 

limited  partnership,  he  may  become  a  member  of,  in  cash, 
sroods  or  merchandize :  Provided,  That  when  such  contri- 
butions  are  made,  in  goods  or  merchandize,  the  same  shall 
first  be  appraised,  under  oath,  by  an  appraiser,  who  shall 
be  appointed  by  the  court  of  common  pleas  of  the  county, 
in  which  such  partnership  is  to  be  carried  on:  Aiid  provided 
also.  That  in  the  certificate  now  required  by  law,  the  nature 
and  value  of  the  said  goods  shall  be  fully  set  forth  and 
described. 

Section  2.  The  business  of  the  partnership  shall  be 
conducted  under  a  firm,  in  which  the  names  of  all  the  gen- 
eral partners  shall  be  inserted,  except,  that  when  there  are 
more  than  two  general  partners,  the  firm  name  may  con- 
sist of  either  two  of  such  partners,  with  the  addition  of  the 
words,  "and  company,"  but  the  said  partnership  shall  put 
up,  upon  some  conspicuous  place  on  the  outside,  and  in  front 
of  the  building  in  which  it  has  its  cliief  place  of  business, 
some  sign,  on  which,  shall  be  painted,  in  legible  English 
characters,  all  the  names,  in  full,  of  all  the  members  of  said 
partnership,  stating  who  are  general,  and  who  are  special, 
partners. 


ACT  OF  FEBRUARY  21,    1 868.^ 

Section  i.  The  firm  name  of  any  limited  partnership 
may  consist  of  the  name  of  any  general  partner,  with  the 
addition  of  the  words  "and  company,"  notwithstanding  the 
name  of  such  general  partner  may  be  common  to  him  and 
any  special  partner ;  but  the  said  partnership  shall  put  up  the 
sign  required  by  the  second  section  of  the  act  approved  the 
thirtieth  of  March,  one  thousand  eight  hundred  and  sixty- 
five,  to  which  this  is  a  supplement.^ 


'  P.  L.  42. 

^  For  annotations  to  these  statutes  see  Pepper  and  Lewis'?   Digest 
of  Laws,  edition  of  1909,  title,  Limited  Partnership,  paragraph  i,  et  seq. 


10  PENNSYLVANIA  ASSOCIATION  ACTS 

SECTION    2.  — ASSOCIATIONS    ORGANIZED    ON 
THE     REPRESENTATIVE     PRINCIPLE. 


REGISTERED  PARTNERSHIPS  UNDER  THE  ACT 

OF  1899.^ 

Section  i.  Where  two  or  more  persons  may  desire 
to  associate  themselves  in  partnership  for  the  purpose  of 
conducting  any  kind  or  kinds  of  business,  trade  or  occu- 
pation, except  the  construction  and  operation  of  electric 
light  and  power  companies,  banking  or  trust  companies,  ar- 
tificial or  natural  gas  companies,  water  companies,  railroad, 
street  passenger  railway,  or  traction  companies,  within  this 
State,  or  any  portion  of  the  United  States  or  elsewhere, 
whose  principal  office  or  place  of  business  shall  be  specified 
in  the  way  and  manner  hereinafter  set  forth  as  being  in- 
tended to  be  established  and  maintained  within  this  State, 
and  may  desire  to  limit  the  liability  of  one  or  more  or  all  of 
the  partners  for  the  debts  of  the  partnership  to  the  amount 
of  capital  subscribed  by  such  partner  or  partners,  respect- 
ively, it  shall  and  may  be  lawful  to  do  so  in  the  manner  fol- 
lowing, to  wit :  Said  partners,  so  desiring  to  associate  them- 
selves, shall  subscribe  to  articles  of  partnership,  wherein 
shall  be  stated  the  name  and  style  of  the  partnership,  its 
purposes  and  duration,  the  county  wherein  its  principal  office 
or  place  of  business  is  to  be  located,  the  names  of  the  sev- 
eral partners,  and  the  amount  of  the  capital  subscribed  by 
each  partner  and  when  and  how  the  same  is  to  be  paid,  and 
the  names  of  the  partners,  one  or  more  or  all,  whose  liabil- 
ity is  to  be  limited  to  the  amount  subscribed  by  each  to  the 
capital.  Such  articles  of  partnership  shall  be  acknowledged 
before  some  officer  competent  to  take  the  acknowledgment 
of  deeds,  and  shall  be  recorded  in  the  office  of  the  recorder 
of  deeds  of  the  county  in  which  is  located  the  place  desig- 
nated as  the  principal  office  or  place  of  business.     Amend- 


'  Act  of  May  9,  P.  L.  261. 


REGISTERED  PARTNERSHIPS  11 

ments  to  said  articles  of  partnership  shall  be  made  in  like 
manner,  and  shall  be  effective  only  when  recorded  in  the 
office  of  the  said  recorder  of  deeds.  A  copy  of  said  articles 
of  partnership,  and  of  all  amendments  thereto,  duly  certi- 
fied by  the  recorder  of  deeds,  shall  also  be  filed,  within 
thirty  days  after  the  recording  of  said  articles  or  amend- 
ments in  said  recorder's  office,  in  the  office  of  the  Secretary 
of  the  Commonwealth.  The  business  of  the  partnership 
may  be  commenced  after  the  articles  of  partnership  ha\'e 
been  left  for  record  in  the  office  of  the  recorder  of  deeds.- 

Section  2.  Notice  of  the  formation  of  the  partnership 
shall  be  published  in  a  newspaper  of  general  circulation  in 
the  county  wherein  is  located  the  place  designated  as  the 
principal  office,  or  place  of  business.  This  notice  shall  be 
published  once  a  week  for  three  weeks.  The  first  publica- 
tion shall  appear  not  later  than  the  day  following  the  filing 
of  the  articles  of  partnership  in  the  office  of  the  recorder 
of  deeds.  This  notice  shall  state  the  name,  style  and  gen- 
eral purpose  of  the  partnership,  the  names  of  the  partners, 
the  amount  of  capital  subscribed  for  by  each  partner,  and 
when  and  how  the  amount  of  such  subscription  is  to-be  paid. 
It  shall  also  state  the  fact  that  the  liability  of  one  or  more 
or  all  of  the  partners  is  limited  in  accordance  with  this  stat- 
ute, and  that  the  articles  of  partnership  have  been  left  for 
record  in  the  office  of  the  recorder  of  deeds.  If  a  time  be 
fixed  in  the  articles  of  partnership  for  its  duration,  such 
time  shall  also  be  stated  in  the  said  notice.  No  name  or 
style  of  partnership  shall  be  adopted  which  will  include  the 
name  of  any  partner  whose  liability  is  intended  to  be  lim- 
ited, unless  there  shall  be  added  the  word  ''Registered.'' 

Section  3.  No  member  of  any  such  partnership  thus 
formed,  recorded  and  published,  whose  liability  is  stated  as 
intended  to  be  limited  in  the  manner  hereinbefore  set  forth, 
shall  be  liable  for  its  debts  under  any  circumstances  saving 
to  the  extent  of  the  amount  of  his  or  her  subscription,  with 

^  The  words  in  italics  were  added  by  the  Act  of  Julv  9,  1901,  P.  L. 
625. 


12  PENxXSYLVANIA  ASSOCIATION  ACTS 

interest  on  unpaid  subscriptions  from  the  date  or  dates  at 
which  the  same  became  actuahy  due  and  payable.  Payment 
of  the  amount  of  the  subscription  of  such  member  of  the 
partnership,  with  interest  as  aforesaid,  shall  exonerate  such 
partner  from  all  further  liability.  A  partner  or  partners 
whose  liability  is  thus  limited  shall  not  be  precluded  from 
transacting  business  with  or  for  the  partnership. 

Section  4.  It  shall  be  lawful  for  said  partnership  to 
adopt  such  by-laws,  rules  and  regulations,  as  a  majority 
of  the  number  in  interest  of  the  partners  from  time  to  time 
may  prescribe  for  the  regulation  of  the  affairs  of  the  part- 
nership. Official  positions  for  the  transaction  of  the  busi- 
ness of  the  partnership  may  be  constituted  by  such  by-laws, 
rules  and  regulations,  and  the  powers  and  duties  of  the  re- 
spective officers  prescribed  therein.  The  partners  may  pro- 
vide that  certain  only  of  the  members  shall  have  active 
charge  of  the  business  and  be  authorized  to  enter  into  con- 
tracts, undertakings  or  engagements  whereby  the  partner- 
ship shall  be  held  liable,  and  may  change  the  same  as  they 
see  fit.  It  shall  be  optional  with  the  partnership  whether 
such  provision  shall  or  shall  not  be  made.  It  shall  also  be 
optional  with  the  partnership,  if  such  provision  be  made,  to 
state  the  same  in  the  original  articles  of  partnership,  or  in 
amendments  thereto,  or  in  any  statement  subscribed  by  the 
partners.  If  the  partners  shall  desire,  any  such  statement 
may  be  acknowledged,  and  may  be  recorded  in  the  office  of 
the  said  recorder  of  deeds.  The  partnership  may  at  its 
option  adopt  and  use  a  common  seal. 

Section  5.  It  shall  be  the  duty  of  said  partnership  to 
keep  posted  in  the  place  designated  as  its  principal  office, 
or  place  of  business,  in  some  place  therein  accessible  to  the 
public  during  business  hours,  a  plainly  written  or  printed 
list  of  the  partners  with  the  amount  of  capital  subscribed 
hv  each,  the  amount  paid  in  by  each  partner,  and  in  the  case 
of  any  partner  whose  liability  is  limited  the  words  "Lim- 
ited Liabilitv"  shall  be  added  to  his  name  where  it  appears 
in  such  list.     This  notice  shall  also  state  the  volume  and 


REGISTERED  PARTNERSHIPS  13 

page  of  the  record  of  the  articles  of  partnership  in  the  office 
of  the  recorder  of  deeds.  If  on  the  signs  used  by  the  part- 
nership, or  if  on  any  bill-heads,  letter-heads,  or  other  pub- 
lications of  the  partnership,  the  names  of  the  several  part- 
ners should  be  stated,  the  words  "Limited  Liability"  shall 
be  added  to  the  name  of  the  partner  whose  liability  is  lim- 
ited in  the  way  herein  provided.  A  violation  of  any  of  the 
provisions  of  this  section  shall  be  a  misdemeanor.  "Each 
member  of  the  partnership  who  shall  participate  in  such 
violation  shall  be  liable  to  prosecution  for  such  misde- 
meanor, and  upon  conviction  shall  be  sentenced  to  pay  a  fine 
of  not  less  than  one  hundred  dollars,  and  not  more  than 
five  hundred  dollars,  for  each  violation  of  the  provisions  of 
said  section. 

Section  6.  If  any  partner  whose  liability  is  limited  in 
the  manner  herein  provided  shall  obtain  credit,  money, 
goods  or  other  valuable  thing  by  a  false  statement  to  the 
efTect  that  he  is  a  general  partner,  he  shall  be  deemed  guilty 
of  a  misdemeanor,  and  upon  conviction  thereof  shall  be 
sentenced  to  pay  a  fine  of  not  less  than  one  hundred  dollars, 
and  not  more  than  five  hundred  dollars. 

Section  7.  Interest  in  said  partnership  shall  be  per- 
sonal estate,  and  may  be  transferred,  given,  bequeathed, 
distributed,  sold  or  assigned,  under  such  rules  and  regula- 
tions as  may,  from  time  to  time,  be  prescribed  by  a  vote  of 
the  majority  in  number  and  interest  of  the  partners;  but,  in 
the  absence  of  such  rules  and  regulations,  the  transferee  of 
any  such  interest  shall  not  be  entitled  to  participation  in  the 
subsequent  business  of  the  partnership  unless  elected  as  a 
partner  therein  by  a  vote  of  the  majority  in  number  and 
interest  of  the  remaining  partners.  And  any  change  of 
ownership,  whether  by  sale,  death,  bankruptcy  or  otherwise, 
which  shall  occur  in  the  absence  of  such  rules  and  regula- 
tions, and  which  shall  not  be  followed  by  election  to  mem- 
bership, shall  entitle  the  owner  or  transferee  to  the  book 
value  of  the  interest  so  acquired,  as  ascertained  and  fixed, 
as  hereinafter  provided,  at  the  last  period  preceding  the 
date  at  which  the  member  parted  with  or  lost  his  interest, 


14  PENNSYLVANIA  ASSOCIATION  ACTS 

with  interest  from  such  date.  It  shall  be  the  duty  of  the 
partnership  at  the  close  of  each  calendar  year  to  ascertain 
and  fix  the  book  value  of  the  several  interests,  a  copy  of 
which  statement  shall  be  delivered  to  each  partner,  and  this 
settlement  shall  be  conclusive  and  final  upon  all  members  of 
the  said  partnership,  and  upon  all  subsequent  owners  or 
transferees  of  any  interest.  The  transfer  of  any  interest, 
however  occurring,  shall  not  dissolve  the  partnership,  nor 
shall  said  partnership  be  dissolved  by  reason  of  the  death  of 
one  or  more  of  the  partners,  unless  the  articles  of  associa- 
tion shall  prescribe  to  the  contrary.  In  case  of  a  change 
in  the  members  of  the  partnership  by  reason  of  death,  trans- 
fer or  otherwise,  it  shall  not  be  necessary  to  make  any  pub- 
lication of  the  fact  thereof. 

Section  8.  If  at  the  expiration  of  the  time  fixed  for 
the  duration  of  the  partnership,  if  any  time  be  so  fixed, 
the  persons  then  constituting  the  partnership  shall  desire  to 
renew  the  same,  they  may  do  so  by  articles  specifying  the 
fact  of  such  renewal  and  the  length  of  time  fixed  for  the 
duration  of  the  renewed  partnership.  Such  agreement  of 
renewal  shall  be  recorded  and  published  in  the  way  and 
manner  hereinbefore  provided  in  the  case  of  an  original 
partnership. 

Section  9.  The  partnership  may  take,  hold,  mortgage, 
incumber,  lease  or  convey,  in  fee  simple,  or  for  any  less 
estate,  real  estate  or  interests  therein,  in  the  firm  name.  The 
place  of  record  of  the  articles  of  partnership  shall  be  stated 
in  all  instruments  of  writing  relating  to  real  estate,  but 
failure  so  to  state  shall  not  invalidate  the  instrument.  Any 
instrument  relating  to  real  estate  may  be  signed  or  sealed  by 
one  or  more  of  the  partners,  for  the  partnership  and  in  the 
partnership  name,  if  the  by-laws,  rules  or  regulations  shall 
so  provide,  but  in  case  less  than  all  the  partners  are  vested 
with  this  power  the  fact  shall  be  stated  in  the  original  arti- 
cles of  partnership,  or  in  amendments  thereto,  or  in  a  state- 
ment duly  signed  and  acknowledged  by  the  partners  and 
recorded  in  the  office  of  the  said  recorder  of  deeds. 

Section   id.   Partnerships  may  be  dissolved  at  any  time 


REGISTERED  PARTNERSHIPS  15 

by  a  vote  of  the  majority  in  number  and  interest  of  those 
who  at  such  time  shall  constitute  the  partnership,  unless 
the  articles  of  association  shall  provide  to  the  contrary.  In 
case  of  dissolution  for  any  cause,  whether  by  expiration  of 
the  period  fixed  for  the  partnership  or  otherwise,  notice 
thereof  shall  be  published  in  one  newspaper  published  in  the 
count}'  designated  as  the  place  wherein  the  principal  office, 
or  place  of  business,  is  located,  for  six  consecutive  issues, 
and  immediately  upon  the  commencement  of  said  advertis- 
ing said  partnership  shall  cease  to  carry  on  its  business,  ex- 
cept so  far  as  may  be  required  for  the  beneficial  winding  up 
thereof.  In  case  of  dissolution,  one  or  more  liquidating 
partners  shall  be  elected  by  a  vote  of  the  majority  in  inter- 
est of  the  partners,  who  shall  have  full  power,  and  be 
charged  with  the  duty  of  settling  the  affairs  of  the  partner- 
ship and  distribution  of  the  assets  thereof  after  payment  of 
its  debts  among  the  partners  in  proportion  to  their  interest. 

Section  ii.  The  partnership  shall  sue  and  be  sued  in 
the  partnership  name,  and  not  by  or  in  the  individual  names 
of  the  partners.  Service  in  case  of  suit  may  be  had  upon 
any  partner  in  the  county  designated  as  that  in  which  the 
principal  office,  or  place  of  business,  of  the  partnership  may 
be  located.  If  no  partner  can  be  served  in  such  county, 
service  may  be  made  upon  any  one  or  more  of  the  partners 
in  any  county  of  the  Commonwealth  in  which  service  can 
be  had. 

Section  12.  All  laws  or  parts  of  laws  inconsistent 
herewith  are  hereby  repealed.  Nothing  herein  contained, 
however,  shall  prevent  the  formation  of  limited  partnerships 
under  the  act  approved  the  twenty-first  day  of  March,  one 
thousand  eight  hundred  and  thirty-six,  and  the  supplements 
thereto,  or  the  formation  of  joint  stock  companies  undei- 
the  provisions  of  the  act  approved  the  second  day  of  June, 
one  thousand  eight  hundred  and  seventy-four,  and  the  sup- 
plements thereto.^ 


'  See   also,    Pepper   and   Lewis's   Digest   of   Laws,   edition   of    1909, 
title,  Limited  Partnerships,  paragraphs  38-60. 


16  PEXXSYLVAXIA  ASSOCIATION  ACTS 

PARTNERSHIP  ASSOCIATIONS  UNDER  THE  ACT 

OF  1874.1 

FORMATION. 

Section  i.  When  any  three  or  more  persons  may 
desire  to  form  a  partnership  association,  for  the  pur- 
pose of  conducting  any  lawful  business  or  occupa- 
tion, including  the  construction,  equipment,  installation, 
and  operation  of  a  telephone  or  telegraph  line,  within  the 
United  States,  or  elsewhere,  whose  principal  office  or  place 
of  business  shall  be  established  and  maintained  within  this 
State,  by  subscribing  and  contributing  capital  thereto,  which 
capital  shall  alone  be  liable  for  the  debts  of  such  association, 
it  shall  and  may  be  lawful  for  such  persons  to  sign  and 
acknowledge,  before  some  officer  competent  to  take  the 
acknowledgment  of  deeds,  a  statement,  in  writing,  in  which 
shall  be  set  forth  the  full  names  of  such  persons,  and  the 
amount  of  capital  of  said  association  subscribed  for  by  each; 
the  total  amount  of  capital,  and  when  and  how  paid;  the 
character  of  the  business  to  be  conducted,  and  the  location 
of  the  same;  the  name  of  the  association,  with  the  word 
"limited"  added  thereto  as  part  of  the  same;  the  contem- 
plated duration  of  said  association,  which  shall  not  in  any 
case  exceed  twenty  years,  and  the  names  of  the  officers  of 
said  association,  selected  in  conformity  with  the  provisions 
of  this  act ;  and  any  amendment  of  said  statement  shall  be 
made  only  in  like  manner,  which  said  statement  and  amend- 
ments shall  be  recorded  in  the  office  of  the  recorder  of  deeds 
of  the  proper  county:  Provided,  however.  That  the  capital 
stock  of  any  telephone  or  telegraph  company,  incorporated 
or  created  in  accordance  zvith  the  provisions  of  this  act,  shall 
not  be  capitalized  at  more  than  the  sum  of  five  thousand 
dollars.- 


'Act  of  June  2,  1874,  P.  L.  271. 

"  The  words  in  italics  were  added  by  the  Act  of  June  7,  1907,  P.  L. 
432. 

As  to  the  character  of  the  capital  to  be  contributed,  see  infra, 
page  21. 


PARTNERSHIP  ASSOCIATIONS  17 

LIABILITY  OF  MEMBERS  OF  THE  ASSOCIATION. 

Section  2.  The  members  of  any  such  partnership  as- 
sociation shall  not  be  liable  under  any  judgment,  decree  or 
order  which  shall  be  obtained  against  such  association,  or 
for  any  debt  or  engagement  of  such  company,  further  or 
otherwise  than  is  hereinafter  provided;  that  is  to  say,  if  any 
execution,  sequestration  or  other  process  in  the  nature  of 
execution,  either  at  law  or  in  equity,  shall  have  been  issued 
against  the  property  or  effects  of  the  company,  and  if  there 
cannot  be  found  sufficient  thereof,  whereon  to  levy  or  en- 
force such  execution,  sequestration  or  other  process,  then 
such  execution,  sequestration  or  other  process  may  be  issued 
against  any  of  the  members  to  the  extent  of  the  portions  of 
their  subscriptions,  respectively,  in  the  capital  of  the  asso- 
ciation not  then  paid  up:  Provided  akvays,  That  no  such 
execution  shall  issue  against  any  member,  except  upon  an 
order  of  court  or  of  a  judge  of  the  court  in  which  the  action, 
suit  or  other  proceeding  shall  have  been  brought  or  insti- 
tuted ;  and  the  said  court  or  judge  may  compel  the  produc- 
tion of  the  books  of  the  association,  showing  the  names  of 
the  members  thereof  and  the  amount  of  capital  remaining 
to  be  paid  upon  their  respective  subscriptions,  and  from 
them  or  other  sources  of  information,  ascertain  the  truth 
in  regard  thereto,  and  may  order  execution  to  issue  ac- 
cordingly ;  and  the  said  association  shall  be  and  it  is  hereby 
required  to  keep  a  subscription  list  book  for  that  purpose, 
and  the  same  shall  be  open  to  inspection  by  the  creditors 
and  members  of  the  association  at  all  reasonable  times. 

Section  3.  The  word  "limited"  shall  be  the  last  word 
of  the  name  of  every  partnership  association,  formed  under 
the  provisions  of  this  act ;  and  every  such  association  shall 
])aint  or  affix,  and  shall  keep  painted  or  affixed,  its  name  on 
the  outside  of  every  office  or  place  in  which  the  business 
of  the  association  is  carried  on,  in  a  conspicuous  position, 
in  letters  easily  legible,  and  shall  have  its  full  name  men- 
tioned in  legible  characters  in  all  n<^tices,  advertisements  and 


18  PENNSYLVANIA  ASSOCIATION  ACTS 

Other  official  publications  of  such  association,  and  in  all  bills 
of  exchange,  promissory  notes,  checks,  orders  for  money, 
bills  of  lading,  invoices,  receipts,  letters  and  other  writ- 
ings used  in  the  transaction  of  the  business  of  the  partner- 
ship association:  Provided,  That  the  omission  of  the  word 
"limited"  in  the  use  of  the  name  of  the  partnership  associa- 
tion shall  render  each  and  every  person  participant  in  such 
omission,  or  knowingly  acquiescing  therein,  liable  for  any 
indebtedness,  damage  or  liability  arising  therefrom. 

TRANSFER    OF    INTEREST. 

Section  4.  Interests  in  such  partnership  associations 
shall  be  personal  estate,  and  may  be  transferred,  given,  be- 
queathed, distributed,  sold  or  assigned,  under  such  rules 
and  regulations  as  such  partnership  associations  shall,  from 
time  to  time,  prescribe  by  a  vote  of  a  majority  of  the  mem- 
bers in  number  and  value  of  their  interests;  and  in  the  ab- 
sence of  such  rules  and  regulations,  the  transferee  of  any 
interest  in  any  such  association  shall  not  be  entitled  to  any 
participation  in  the  subsequent  business  of  such  association, 
unless  elected  to  membership  therein,  by  a  vote  of  a  majority 
of  the  members  in  number  and  value  of  their  interests.  And 
any  change  of  ownership,  whether  by  sale,  death,  bank- 
ruptcy or  otherwise,  which  occurs  in  the  absence  of  any 
rules  and  regulations  of  such  associations  regulating  such 
transfer,  and  which  is  not  followed  by  election  to  member- 
ship in  such  associations,  shall  entitle  the  owner  or  fraiis- 
feree  only  to  the  value  of  the  interest  so  acquired  at  the  date 
of  acquiring  such  interest,  at  a  price  and  upon  terms  to  be 
mutually  agreed  upon,  and  in  default  of  such  agreement,  at 
a  price  and  upon  terms  to  be  fixed  by  an  appraiser  to  be 
appointed  by  the  court  of  common  pleas  of  the  proper 
county,  on  the  petition  of  either  party,  which  appraisement 
shall  be  subject  to  the  approval  of  said  court.^ 


^  The  words  printed  in  italics  were  added  by  the  Act  of  June  25, 
1885,  P.  L.  182.  This  first  amendment,  without  changing  the  meaning, 
changes  slightly  the  wording  of  the  text  of  the  section  as  it  stood  in 
the  Act  of   1874. 


PARTNERSHIP  ASSOCIATIONS  19 

ORGAXIZATIOX. 

Section  5.  There  shall  be  at  least  one  meeting  of  the 
members  of  the  association  in  each  year,  at  one  of  the  meet- 
ings there  shall  be  elected  not  less  than  three  nor  more  than 
five  [nine]  managers  of  the  association,  one  of  whom  shall 
be  the  chairman,  one  the  treasurer  and  one  the  secretary, 
or  the  offices  of  both  treasurer  and  secretary  may  be 
filled  by  one  person,  who  shall  hold  their  respective  offices 
one  year  and  until  their  successors  are  duly  installed.  The 
hoard  of  managers  are  authorized  to  fix  the  salary  and 
eonipensation  of  such  officers  and  the  salary  and  com- 
pensation of  other  employes,  but  the  president,  secretary 
and  treasurer  shall  not  receive,  as  salary  or  compensation, 
after  such  association  has  been  in  existence  for  five  years,  a 
sum  in  the  aggregate  greater  than  the  amount  of  net  earn- 
ings actually  earned  during  the  year  preceding,  unless  by 
the  consent  of  tzvo-thirds  of  all  the  members  of  the  associa- 
tion; and  the  salary  of  the  president,  secretary  and  treas- 
urer shall  be  fixed  for  the  ensuing  year,  by  a  two-thirds 
vote  of  the  value  of  interest  present  at  the  annual  meeting 
of  the  association,  and  after  the  annual  report  has  been 
made.  Xo  debt  shall  be  contracted  or  liability  incurred  for 
such  association  except  by  one  or  more  of  the  managers, 
and  no  liability  greater  than  five  hundred  dollars  except 
against  the  person  incurring  it  shall  bind  the  association, 
unless  reduced  to  writing  and  signed  by  at  least  two  man- 
agers.^ 


*  The  words  printed  in  italics  were  added  by  the  Act  of  Maj'  10, 
1889,  Section  i,  P.  L.  183.  The  wording,  but  not  the  meaning,  of  the 
rest  of  the  section  is  shghtly  changed.  See  supra,  note  3.  The  section 
was  shghtly  amended  by  the  Act  of  June  11,  1879,  P.  L.  124,  which  per- 
mitted seven  managers  to  be  chosen.  The  Act  of  1889  returns  to  the 
earlier  provision  on  this  subject.  The  section,  however,  is  again 
modified  by  the  Supplement  of  June  8,  1S95,  P.  L.  186,  which  provides: 
"Section  2.  That  all  associations  organized  under  the  act  to  which 
this  is  a  supplement  shall  have  the  power,  by  the  vote  of  a  majority 
in  number  and  interest  of  its  members,  to  adopt  by-laws  for  the  regu- 
lation thereof,  fixing  therein  the  number  of  managers,  which  number 
shall  not  be  less  than  three  nor  more  than  nine,  and  designating  the 
principal  executive  officer  either  as  president  or  chairman. 

"Section  3.    The  managers  of  all  associations,  organized  under  the 


20  PENNSYLVANIA  ASSOCIATION  ACTS 

CERTAIN  RIGHTS  AND  DUTIES. 

Section  6.  The  association  may,  from  time  to  time, 
divide  the  profits  of  its  business  in  such  manner  and  in  such 
an  amount  as  a  majority  of  its  managers  may  determine, 
which  profits  so  divided  shall  not  at  the  time  diminish  or 
impair  the  capital  of  the  said  association;  and  any  one 
consenting  to  a  dividend  which  shall  diminish  or  impair 
the  capital  shall  be  liable  to  any  person  or  persons  inter- 
ested or  injured  thereby  to  th'S  amount  of  such  diminution 
or  impairment. 

Section  7.  It  shall  not  be  lawful  for  such  association 
to  loan  its  credit,  its  name  or  its  capital  to  any  member  of 
said  association,  and  for  such  loan  to  any  other  person  or 
association  the  consent  in  writing  of  a  majority  in  number 
and  value  of  interest  shall  be  requisite. 

dissolution. 

Section  8.   Such  association  may  be  dissolved. 

First.  Whenever  the  period  fixed  for  the  duration  of 
the  association  expires. 

Second,  ^^1^enever,  by  a  vote  of  a  majority  in  number 
and  value  of  interest,  it  shall  be  so  determined,  and  notice 
of  such  winding  up  shall  be  given  by  publication  in  two 
newspapers  published  in  the  proper  city  or  county  at  least 
six  consecutive  times,  and  immediately  upon  the  com- 
mencement of  said  advertising,  said  association  shall  cease 
to  carry  on  its  business,  except  so  far  as  may  be  required 
for  the  beneficial  winding  up  thereof. 

Section  9.  When  any  such  partnership  association 
shall  be  dissolved  by  the  voluntary  action  thereof,  its  prop- 
erty shall  be  applied  and  distributed  as  follows; 

First.  To  the  payment  of  all  debts  for  wages  of  labor. 

Second.  To  the  satisfaction  of  its  other  liabilities  and 
indebtedness. 


act  to  which  this  is  a  supplement,  shall  be  chosen  by  ballot,  in  person 
or  by  proxy,  by  a  majority  in  value  of  interest  of  the  members  thereof 
voting  at  such  election." 


PARTXHRSHIP  ASSOCIATIONS  21 

Third.  After  payment  thereof,  the  same  shall  be  dis- 
tributed to  and  among  the  members  thereof  in  proportion 
to  their  respective  interests,  in  the  following  manner : 

Fourth.  Three  liquidating  trustees,  not  more  than  two 
of  zi'horn  shall  have  been  a  manager  of  the  association  so  dis- 
solved  and  in  liquidation,  shall  be  elected  by  the  members  of 
tlie  association,  who  shall  have  full  power  to  settle  the  afifairs 
of  the  association,  and  distribute  the  assets  thereof  after 
the  payment  of  its  debts,  among  the  members  under  the 
direction  of  the  court  of  common  pleas  of  the  proper  county."' 

Section  io.  That  no  amendment,  modification  or  re- 
peal of  this  act  shall  affect  any  thing  duly  done,  right  ac- 
quired, liability  incurred,  or  penalty,  forfeiture  or  other  pun- 
ishment incurred  or  to  be  incurred,  in  respect  of  any  offence 
against  the  provisions  of  this  act  before  such  amendment, 
modification  or  repeal  comes  into  operation. 

EXECUTION    OF    DEEDS. ^ 

Section  i.  Whenever  any  association,  formed  under 
the  act  to  which  this  is  a  supplement,  shall  have  occasion  to 
execute  any  deed  of  conveyance,  or  bonds  with  or  without 
coupons,  and  mortgages,  to  secure,  purchase  or  borrow 
moneys,  such  association  shall  have  a  right  to  adopt  and  use 
a  common  seal,  and  to  acknowledge  such  instruments  or 
writings  by  their  chairman  and  secretary. 

character  of  contribution.' 

Section  i.  It  shall  and  may  be  lawful  for  any  person 
desiring  to  form  a  partnership  association,  under  the  act 
to  which  this  is  a  supplement,  to  make  contribution  to  the 
capital  thereof  in  real  or  personal  estate,  mines  or  other 
property,  at  a  valuation  to  be  approved  by  all  the  members 


°  The  words  printed  in  italics  were  added  by  the  Act  of  May  lo, 
1889,  Section  2,  P.  L.  184.  The  wording,  but  not  the  meaning  of  the 
rest  of  the  clause  is  slightly  changed.     See  supra,  note  3. 

'Act  of  February  18,  1875,  P.  L.  3. 

'Act  of  May  i,  1876,  P.  L.  89. 


22  PENNSYLVANIA  ASSOCIATION  ACTS 

subscribing  to  the  capital  of  such  association :  Provided, 
That  in  the  statement  required  to  be  recorded  by  the  first 
section  of  the  said  act,  subscriptions  to  the  capital,  whether 
in  cash  or  in  property,  shall  be  certified  in  this  respect  ac- 
cording to  the  fact;  and  when  property  has  been  contrib- 
uted as  part  of  the  capital,  a  schedule  containing  the  names 
of  the  parties  so  contributing  with  a  description  and  valua- 
tion of  the  property  so  contributed  shall  be  inserted. 

Section  2.  That  all  contributions  to  the  capital  of  such 
associations,  heretofore  organized  under  the  act  to  which 
this  is  a  supplement,  in  real  or  personal  estate,  mines  or  other 
property,  at  a  valuation  agreed  upon  by  all  the  members 
subscribing  to  such  capital,  shall  be  as  complete  and  effectual 
as  if  the  same  had  been  made  in  cash:  Provided,  A  certifi- 
cate of  the  same  shall  be  recorded  as  required  in  the  first 
section  of  this  act. 

Section  3.  That  all  real  estate  owned  or  purchased  by 
any  association  heretofore  created,  or  which  may  be  here- 
after created,  under  and  by  virtue  of  the  act  to  which  this 
is  a  supplement,  shall  be  held  and  owned  and  conveyance 
thereof  shall  be  made  in  the  association  name ;  that  said 
association  shall  sue  and  be  sued  in  their  association  name ; 
and  when  suit  is  brought  against  any  such  association,  ser- 
vice thereof  shall  be  made  upon  the  chairman,  secretary  or 
treasurer  thereof,  which  service  shall  be  as  complete  and 
effective  as  if  made  upon  each  and  every  member  of  such 
association. 

SERVICE  OF   LEGAL   PROCESS.^ 

Section  i.  Any  partnership  association,  organized 
under  the  said  act  and  the  several  supplements  thereto,  may, 
in  addition  to  the  methods  already  authorized,  be  serv^ed 
with  legal  process  in  any  county  of  this  commonwealth 
where  said  association  shall  maintain  and  keep  an  office  for 
the  transaction  of  business,  by  serving  such  process  upon 
any  agent,  chief  or  any  other  clerk  or  upon  any  director 


'Act  of  June  lo,  1881,  P.  L.  115. 


PARTNERSHIP  ASSOCIATIONS  23 

or  manager  of  such  association,  and  such  service  shall  be 
good  and  valid  in  law  to  all  intents  and  purposes  as  service 
upon  such  association. 


•r      9 


COXTINUATIOX. 

Section  i.  It  shall  and  may  be  lawful  for  a  majority 
in  number  and  value  of  interest  of  the  members  of  any  part- 
nership association  fonned  under  the  provisions  of  the  act 
of  Assembly  to  which  this  is  a  supplement,  to  renew  or  con- 
tinue such  partnership  association  for  a  period  of  time  not 
exceeding  twenty  years  beyond  the  time  originally  fixed  for 
its  duration,  under  the  following  conditions  and  restrictions, 
to  wit : 

First.  A  meeting  of  the  members  of  the  association 
shall  be  called,  of  the  time,  place  and  oljject  of  which 
meeting  due  notice  shall  be  given  by  publication  once  a 
week  for  two  successive  weeks  preceding  such  meeting  in 
one  newspaper  published  in  the  county  in  which  the  prin- 
cipal office  or  place  of  business  shall  be  established,  and  by 
such  further  notice  as  shall  be  prescribed  in  the  by-laws; 
and  at  such  meeting  the  resolution  for  the  renewal  or  con- 
tinuance of  the  association  shall  be  considered,  and  a  vote  by 
ballot,  in  person  or  by  proxy,  taken  for  the  adoption  or  re- 
jection of  the  same;  and  if  a  majority  in  number  and  value 
of  interest  of  the  members  of  such  association  shall  be  in 
favor  of  such  renewal  or  continuance,  then  a  statement  in 
writing  shall  be  signed  and  acknowledged  by  three  or  more 
members,  in  which  shall  be  set  forth  the  full  names  of  the 
members  desiring  to  renew  or  continue  such  association, 
and  the  contemplated  duration  or  continuance,  which  shall 
not  in  any  case  exceed  twenty  years  beyond  the  time  origi- 
nally fixed  for  the  duration  of  the  association. 

Second.  Upon  the  filing  of  such  statement  such  associa- 
tion shall  be  renewed  and  may  be  continued  for  the  extended 
time  herein  mentioned. 


Act  of  June  8,  1895,  P-  L.  186. 


24  PENNSYLVANIA  ASSOCIATION  ACTS 

Third.  That  if  any  member  of  any  such  partnership 
association  shall  be  dissatisfied  with  or  object  to  any  such  re- 
newal or  continuance,  then  the  owner  shall  be  entitled  to 
his  interest  in  the  association  at  a  price  and  upon  terms  to  be 
mutually  agreed  upon;  and  in  default  of  such  agreement, 
the  price  and  terms  shall  be  fixed  by  an  appraiser  appointed 
by  the  court  of  common  pleas  of  the  proper  county,  subject 
to  the  approval  of  the  said  court,  and,  upon  the  payment 
of  the  interest  as  aforesaid,  the  said  member  shall  transfer 
his  interest  to  said  association  to  be  disposed  of  by  the 
managers,  or  be  retained  by  them  for  the  benefit  of  the  re- 
maining members. 


CORPORATIONS  25 

THE  CORPORATION  ACT  OF  1874.^ 

Section  i.  Corporations  may  be  formed  under  the 
provisions  of  this  act  by  the  voluntary  association  of  five  or 
more  persons,  for  the  purposes,  and  in  the  manner  men- 
tioned herein,  and  when  so  formed,  each  of  them  by  virtue 
of  its  existence  as  such,  shall  have  the  following  powers, 
unless  otherwise  specially  provided : 


^  Act  of  April  29,  1874,  P.  L.  jt,.  Those  sections  of  the  Act  which 
relate  only  to  one  or  more  kinds  of  corporations,  but  not  to  all  cor 
porations  of  either  the  first  or  second  class,  or  both,  are  omitted. 

Besides  the  Act  of  1874,  its  amendments  and  supplements,  many 
different  kinds  of  companies  have  been  made,  both  before  and  since 
the  Act  of  1874,  the  subject  of  separate  legislation.  A  list  of  the  more 
important  acts  relating  to  railroad  and  street  railroad  companies  and 
other  important  kinds  of  companies,  will  be  found  infra,  page  78; 
but  a  complete  view  of  the  history  and  present  status  of  the  legislation 
of  the  State  on  corporations,  apart  from  the  special  charters  granted 
prior  to  the  Constitution  of  1874,  can  be  obtained  by  examining  Pepper 
and  Lewis's  Digest  of  Laws,  edition  of  1909,  title.  Corporations,  cols. 
1659-2044,  and  the  other  titles  referred  to,  col.  1659,  together  with  the 
list  of  acts  repealed,  amended,  supplied  and  in  force,  printed  in  con- 
nection with  the  title  Corporations,  cols.  1676-1687,  and  similar  lists 
printed  in  connection  with  such  titles  as  Banks  and  Banking,  Insurance, 
Railroads  and  Canals,  and  other  titles  referred  to,  col.  1659. 

The  provisions  in  the  Constitution  of  the  State  relating  to  corpora- 
tions will  be  found  in  Art.  Ill,  Section  7;  which  provides,  "The  General 
Assembly  shall  not  pass  any  *  *  *  special  law  *  *  *  creating 
corporations,  or  amending,  renewing,  or  extending  the  charters  thereof"  ; 
Art.  IX,  Section  3,  which  provides,  that  "The  poweY  to  tax  corporations 
and  corporate  property  shall  not  be  surrendered  or  suspended  by  any 
contract  or  grant  to  which  the  State  shall  be  a  party" ;  Art.  IX,  Section 
7,  which  prohibits  the  General  Assembly  from  authorizing  any  public 
corporation  to  become  a  stockholder  in,  or  to  loan  its  credit  to,  any 
corporation ;  and  Art.  XVI,  which  relates  exclusively  to  private  cor- 
porations. 

The  provisions  of  Art.  XVI  to  be  especially  noticed  are.  Section  4. 
which  provides  that  "In  all  elections  for  directors  or  managers  of  a 
corporation  each  member  or  shareholder  may  cast  the  whole  number 
of  his  votes  for  one  candidate,  or  distri'-ute  them  upon  two  or  more  can- 
didates, as  he  may  prefer" ;  Section  6,  which  prohibits  any  corporation 
from  engaging  in  any  business  not  "expressly  authorized  in  its  charter" ; 
Section  7,  which  provides  that  stock  or  bonds  shall  not  be  issued,  "ex- 
cept for  mone}',  labor  done,  or  money  or  property  actually  received." 
and  that  the  stock  and  indebtedness  shall  not  be  increased  except  in 
pursuance  of  general  law.  "nor  witliout  the  consent  of  the  persons 
holding  the  larger  amount  in  value  of  the  stock,  first  obtained  at  a  meet- 
ing to  be  held  after  sixty  days'  notice  given  in  pursuance  of  law" ;  and 
Section  10,  which  confers  on  the  General  Assembly  the  power  "to 
alter,  revoke  or  annul  any  charter  of  incorporation  now  existing  and 
revocable  at  the  adoption  of  this  Constitution,  or  any  that  may  here- 
after be  created,  whenever  in  their  opinion  it  may  be  injurious  to 
the  citizens  of  this  Commonwealth,  in  such  manner,  however,  that  no 
injustice  shall  be  done  to  the  corporators." 


26  PENNSYLVANIA  ASSOCIATION  ACTS 

GENERAL    POWERS. 

First.  To  have  succession  by  its  corporate  name  for  the 
period  hmited  by  its  charter,  and  when  no  period  is  hmited 
thereby,  or  by  this  act,  perpetually,  subject  to  the  power  of 
the  general  assembly,  under  the  constitution  of  this  com- 
monwealth. 

Second.  To  maintain  and  defend  judicial  proceedings. 

Third.  To  make  and  use  a  common  seal  and  alter  the 
same  at  pleasure. 

Fourth.  To  hold,  purchase  and  transfer  such  real  and 
personal  property  as  the  purposes  of  the  corporation  re- 
quire, not  exceeding  the  amount  limited  by  its  charter  or  by 
law. 

Fifth.  To  appoint  and  remove  such  subordinate  officers 
and  agents  as  the  business  of  the  corporation  requires,  and 
to  allow  them  a  suitable  compensation. 

Sixth.  To  make  by-laws  not  inconsistent  with  law,  for 
the  management  of  its  property,  the  regulation  of  its  affairs 
and  the  transfer  of  its  stock. 

Seventh.  To  enter  into  any  obligation  necessary  to  the 
transaction  of  its  ordinary  affairs. 

CLASSES. 

Section  2.  The  purposes  for  which  the  said  corpora- 
tion may  be  formed,  shall  be  as  follows,  and  shall  be  divided 
into  two  classes : 

CORPORATIONS  NOT  FOR  PROFIT FIRST  CLASS. 

The  first,  those  for — 

I.  The  support  of  public  worship. 

II.  The  support  of  any  benevolent,  charitable,  educa- 
tional or  missionary  undertaking. 

III.  The  support  of  any  literary,  medical  or  scientific 
undertaking,  library  association,  or  the  promotion  of  music, 
painting  or  other  fine  arts. 


CORPORATIONS  27 

IV.  The  encouragement  of  agriculture  and  horticul- 
ture. 

V.  The  maintenance  of  public  or  private  parks,  and  of 
facilities  for  skating,  boating,  trotting  and  other  innocent 
or  athletic  sports,  including  clubs  for  such  purposes,  and  for 
the  preservation  of  game  and  fish. 

VI.  The  maintenance  of  a  club  for  social  enjoyments. 

VII.  The  maintenance  of  a  public  or  private  ceme- 
tery. 

VIII.  The  erection  of  halls  for  public  or  private  pur- 
poses. 

IX.  The  maintenance  of  a  society  for  beneficial  or  pro- 
tective purposes  to  its  members  from  funds  collected 
therein. 

X.  The  support  of  fire  engine,  hook  and  ladder,  hose 
or  other  companies  for  the  control  of  fire. 

XI.  For  the  encouragement  and  protection  of  trade 
and  commerce. 

XII.  For  the  formation  and  maintenance  of  military 
organizations. - 

XIII.  For  the  maintenance  of  a  society  for  the  im- 
provement of  the  streets  and  public  places  in  any  city,  bor- 
ough or  township  in  this  commonwealth." 

XIV.  For  receiving  and  holding  property,  real  and 
personal,  of  and  for  unincorporated  religious,  beneficial, 
charitable,  educational,  and  missionary  societies  and  associ- 
ations, and  executing  trusts  thereof.'* 

[The  prevention  of  cruelty  to  children  and  aged  per- 
sons.]^ 


"  Paragraphs  XI  and  XII  were  added  by  the  Act  of  June  lo,  1893, 
P.  L.  435,  439. 

'  Paragraph  XIII  was  added  by  the  Act  of  June  25,  1895,  P.  L.  313. 

*  Paragraph  XIV  was  added  by  the  Act  of  July  15,  1897,  P.  L.  283. 

°  This  provision  is  found  in  the  amendment  to  the  Act  of  1874,  of 
May  25,  1887,  P.  L.  266.  The  Act  of  June  10,  1893,  P.  L.  435.  which 
purported  to  amend  Section  2  of  the  Act  of  1874,  in  attempting  to 
recite  the  section  as  it  had  been  amended,  omitted  to  inchide  in  the 
"Corporations  not  for  profit,"  the  "prevention  of  cruehy  to  children 
and  aged  persons."  All  reference  to  this  class  of  corporations  was 
also   omitted   in    the   enacting   clauses.      Query,   whether   this    class   of 


28  PENNSYLVANIA  ASSOCIATION  ACTS 

Each  of  the  said  corporations  may  hold  real  estate  to 
an  amount  the  clear  yearly  value  or  income  whereof  shall 
not  exceed  twenty  thousand  dollars.^ 

CORPORATIONS    FOR    PROFIT SECOND    CLASS. 

The  second  class,  those  for — 

I.  The  insurance  of  the  lives  of  domestic  animals. 

II.  The  insurance  of  human  beings  against  death, 
sickness  or  personal  injury. 

III.  The  prevention  and  punishment  of  theft  or  wilful 
injuries  to  property,  and  insurance  against  such  risks. 

IV.  The  construction  and  maintenance  of  any  species 
of  road  other  than  a  railroad,  and  of  bridges  in  connection 
therewith. 

V.  The  construction  and  maintenance  of  a  bridge  over 
streams  within  this  state. 

VI.  The  construction  and  maintenance  of  a  telegraph 
line. 

VII.  The  establishment  and  maintenance  of  a  ferry. 

VIII.  The  building  of  ships,  vessels  or  boats,  and  car- 
riage of  persons  and  property  thereon. 

IX.  The  supply  of  water  to  the  public. 

X.  The  supply  of  ice  to  the  public. 

XL  The  manufacture  and  supply  of  gas,  or  the  sup- 
ply of  light  or  heat  to  the  public  by  any  other  means. 

XII.  The  transaction  of  a  printing  and  publishing 
business. 

XIII.  The  establishment  and  maintenance  of  an  hotel 


associations  not  for  profit  can  now  be  incorporated  under  the  Amend- 
ment of  1887? 

'The  Act  of  June  8,  1891,  P.  L.  21T,  provides:  "It  shall  and  may  be 
lawful  for  any  corporation  incorporated  under  the  laws  of  this  State, 
or  of  any  other  State  of  the  United  States,  to  take,  have  and  hold 
real  estate  heretofore  given  or  devised,  or  hereafter  given  or  devised 
to  such  corporation  to  be  used  for  any  religious  or  charitable  purposes  : 
Provided,  That  nothing  herein  contained  shall  be  taken  to  relieve  such 
real  estate  from  being  taxed  in  like  manner  with  other  real  estate 
within  this  Commonwealth  :  And  provided  further.  That  all  real  estate 
held  under  the  provisions  of  this  act,  shall  be  sold  by  such  corporations 
within  five  years  from  the  time  the  right  of  possession  shall  accrue  to 
such  corporation." 


CORPORATIONS  •  29 

and  drozryard/  or  boarding  house,  opera  and  market  house, 
or  either. 

XIV.  The  creating,  purchasing,  holding  and  selhng  of 
patent  rights  for  inventions  and  designs,  and  the  purchas- 
ing of  copyrights  for  book  publications,  and  registered 
trade-marks,^  with  the  right  to  issue  license  for  the  same 
and  receive  pay  therefor. 

XV.  Building  and  loan  association. 

XVI.  Associations  for  the  purchase  and  sale  of  real 
estate,  or  for  holding,  leasing  and  selling  real  estate,  for 
maintaining  or  erecting  zvalls  or  banks  for  the  protection  of 
lozu  lying  lands,^  for  safe  deposit  companies,  a)id  for  buy- 
ing, selling,  trading  or  dealing  in  any  kind  or  kinds  of  goods, 
zvares  and  merchandise  at  wholesale}^ 

XVII.  The  manufacture  of  iron  or  steel,  or  both,  or 
of  any  other  metal,  or  of  any  article  of  commerce  from 
metal  or  wood,  or  both. 

XVIII.  The  carrying  on  of  any  mechanical,  mining, 
quarrying  or  manufacturing  business,  including  all  the 
purposes  covered  by  the  provisions  of  the  acts  of 
the  General  Assembly,  entitled  "An  act  to  encourage  manu- 
facturing operations  in  this  Commonwealth,"  approved 
April  seventh,  one  thousand  eight  hundred  and  forty-nine, 
entitled  "An  act  relating  to  corporations  for  mechanical, 
manufacturing,  mining  and  quarr}'ing  purposes,'.'  approved 
July  eighteenth,  one  thousand  eight  hundred  and  sixty- 
three,  and  the  several  supplements  to  each  of  said  acts, 
including  the  incorporation  of  grain  elevators,  storage 
house '^'^  and  storage  yard  companies;  also  including  com- 
panies for  the  storage,  transportation  and  furnishing'^-  of 
water,  with  the  right  to  take  rivulets  and  land  and  erect 


'Added  by  the  Act  of  June  lo,  1893,  P-  L.  435. 
*  Added  by  the  Act  of  May  16,  1889,  Section  i.  P.  L.  241. 
"Added  by  the  Act  of  April  17,  1876,  P.  L.  31. 
"  Added  by  the  Act  of  June  25,  1895,  P.  L.  295. 
"  The  Act  of  1874  read  "Warehouse."     Changed  by  Act  of  June 
22,  1883,  P.  L.  156. 

"Added  by  the  Act  of  May  21,  1889,  P.  L.  259. 


30  PEXXSYLVAXIA  A330CIATIOX  ACTS 

reservoirs  for  holding  water,  for  manufacturing  and  other 
purposes,  and  for  the  creation,  establishing,  furnishing, 
transmission  and  nsing  of  water  power  therefrom;^^  the 
construction  of  dams  in  any  stream,  and  the  driving  and 
floating  of  sazv  logs,  lumber  and  timber  on  and  over  any 
stream,  not  exceeding  thirty-five  miles  in  length  from  their 
source,  by  the  usual  methods  of  driving  and  floating  logs, 
timber  and  lumber  on  streams,  and  so  as  not  [/o]  obstruct 
the  descending  navigation  by  rafts  and  boats ;'^^  also  includ- 
ing the  manufacture  and  brewing  of  malt  liquors,^''  and 
also  including  companies  for  the  transaction  of  any  lawful 
business  not  otherwise  specifically  provided  for  by  act  of 
Assembly:  Provided,  hozvever,  That  no  corporation  shall 
be  chartered  under  this  amendment  zvith  the  authority  to 
transact  more  than  one  kind  of  business,  zvhich  must  be 
set  forth  in  the  charter.''-'^ 

"Added  by  the  Act  of  May  21,  1889,  P.  L.  259. 

"Added  by  the  Act  of  June  22,  1883,  P.  L.  156.  The  length  of 
streams  in  the  Act  of  1883  was  20  miles.  The  Act  of  June  10,  1893, 
P.  L.  412,  extended  the  "length  of  the  streams"  which  may  be  used 
from  20  to  35  miles.  The  words  "from  their  source"  were  also  added 
by  the  Act  of  1893. 

''Added  by  the  Act  of  April  10.  1879.  P-.L-  20.  The  Act  of  1874 
contained  the  words  "and  excluding  the  distilling  or  manufacture  of 
intoxicating  liquors."  These  words  were  retained  in  all  amendments 
until  the  Act  of  July  9,  1901,  P.  L.  624. 

"Added  by  the  Act  of  July  9,  1901,  P.  L.  20. 

The  difificulty  of  properly  stating  this  eighteenth  paragraph  is  greatly 
increased  by  the  confusion  resulting  from  the  legislation  of  1893.  In 
that  year  we  find  two  acts,  both  approved  on  June  10,  one  printed  on 
page  412  of  the  Pamphlet  Laws,  the  other  on  page  435.  The  act  on 
page  412  purports  to  amend  only  the  eighteenth  paragraph  of  Section 
2  of  the  Act  of  1874.  It  correctly  recites  the  paragraph  as  it  had  been 
extended  by  prior  amendments,  and  then  re-enacts  the  paragraph, 
changing  merely  the  length  of  streams  which  may  be  used  by  certain 
companies.  See  supra,  note  14.  The  act  on  page  435  purports  to  be 
a  general  amendment  of  Section  2  of  the  Act  of  1874.  This  act,  in 
reciting  the  eighteenth  paragraph,  recites  the  paragraph  as  it  stood 
in  the  Act  of  1874,  ignoring  the  intervening  amendments  extending 
the  paragraph.  So  also,  in  re-enacting  the  eighteenth  paragraph,  the 
language  of  the  paragraph  as  it  stood  in  the  Act  of  1874  was  used.  The 
Act  of  July  9,  1901,  amends  the  eighteenth  paragraph  merely.  In  re- 
citing the  paragraph,  the  Act  of  1893  printed  on  page  43=;  is  ignored, 
and  the  paragraph  is  recited  and  re-enacted  with  the  additions  noted, 
siif'ra,  as  the  paragraph  stood  with  all  its  extensions  orior  to  the  le^is- 
In^'nn  of  1893.  In  stating  the  paragraph  we  have  followed  the  Legis- 
lature of  T90T  and,  as  far  as  this  paragraph  is  concerned,  ignored  the 
Act  of  1893,  printed  on  page  435  of  the  Pamphlet  Laws. 


CORPORATIOXS  31 

XIX.  The  insurance  of  owners  of  real  estate,  mort- 
gagees, and  others  interested  in  real  estate,  from  loss  by 
reason  of  defective  titles,  liens  and  incumbrances. 

XX.  The  re-chartering  of  corporations  of  either  of 
these  classes  the  charters  whereof  are  about  to  expire. 

XXI.  The  construction  and  maintenance  of  a  wharf 
or  wharves,  for  public  and  private  use,  and  the  mainte- 
nance of  any  unincorporated  wharf  or  wharves  already 
constructed. 

XXII.  The  construction,  erection  and  maintenance  of 
observatories  for  public  use  or  scientific  j^urposes. 

XXIII.  The  formation  and  operation  of  stage  and 
omnibus  lines. 

XXI\'.  The  formation  and  operation  of  inclined 
planes  for  the  transportation  of  passengers  and  freight.^' 
or  for  the  construction  and  maintenance  of  tunnels  or  un- 
derground passageways.^^ 

XXV.  The  construction  and  maintenance  of  sewers, 
culverts,  conduits  and  pipes,  with  all  necessary  in- 
lets and  appliances  for  surface,  under-surface  and  sewage 
drainage  for  the  health,  comfort  and  convenience  of  in- 
habitant, and  sanitar}-  improvement  in  cities,  boroughs  and 
townships  of  the  Commonwealth,  and  for  this  purpose  to 
enter  upon  and  occupy  any  public  highway  with  the  consent 
of  the  local  authorities.^^ 

MODE    OF    IXCORPORATIOX. 

Sectiox  3.  The  charter  of  an  intending  corporation 
must  be  subscribed  by  five  or  more  persons,  three  of  whom  ' 
at  least  must  be  citizens  of  this  commonwealth,  and  shall 
set  forth^'^ 


"  Paragraphs  XXI,  XXII,  XXIII,  and  this  much  of  paragraph 
XXIV  were  added  by  the  Act  of  April  17,  1876,  P.  L.  30. 

"Added  by  the  Act  of  June  25,  1895,  P.  L.  311. 

"Paragraph  XXV  was  added  by  the  Act  of  Ji:ne  10.  189.3,  P.  L- 
435.  The  Act  of  June  13.  1883.  Section  6.  P.  L.  122,  provided  for  the 
motors  and  cables." 

°°  By  the  Act  of  April  23,  1903.  P.  L.  272.  three  persons  may  form 
a  corporation  of  the  second  class;  two  of  wh.om  must  subscribe  to  the 
charter,  one  of  whom  must  be  a  citizen  of  Pennsylvania. 


Z2  PENNSYLVANIA  ASSOCIATION  ACTS 

CONTENTS  OF  CERTIFICATE. 

I.  The  name  of  the  corporation. 

II.  The  purpose  for  which  it  is  formed. 

III.  The  place  or  places  where  its  business  is  to  be 
transacted. 

IV.  The  term  for  which  it  is  to  exist. 

V.  The  names  and  residence  of  the  subscribers  and  the 
number  of  shares  subscribed  by  each. 

VI.  The  number  of  its  directors  and  the  names  and 
residences  of  those  wdio  are  chosen  directors  for  the  first 
year. 

VII.  The  amount  of  its  capital  stock,  if  any,  and  the 
number  and  par  value  of  shares  into  which  it  is  divided.-^ 

NOTICE   TO   BE  GIVEN. 

Notice  of  the  intention  to  apply  for  any  such  charter 
shall  be  inserted  in  two  newspapers  o-f  general  circulation, 
printed  in  the  proper  county,  for  three  weeks,  setting  forth 
briefly  the  character  and  object  of  the  corporation  to  be 
formed,  and  the  intention  to  make  application  therefor. 

CERTIFICATES  FOR  FIRST   CLASS. 

The  said  certificates  of  incorporation  of  the  first  class 
shall  be  acknowledged  by  at  least  three  of  those  who  sub- 
scribe to  them  before  the  recorder  of  deeds  of  the  county 
in  which  the  business  of  the  corporation  is  to  be  transacted, 


^  The  Act  of  June  25,  1895,  P.  L.  310,  Section  i.  provides:  "All  cor- 
porations organized  not  for  profit  under  the  provision  of  'An  act  to 
provide  for  the  incorporation  and  regulation  of  certain  corporations.' 
approved  April  twenty-ninth,  one  thousand  eight  hundred  and  seventy- 
four  and  the  several  supplements  thereto,  shall  have  authority,  if  a 
majority  of  its  members  shall  so  ordain,  to  issue  capital  stock  to  an 
amount  not  exceeding  two  hundred  a.-d  fifty  thousand  dollars,  in  shares 
of  the  par  value  of  fifty  dollars.  '  Said  power  to  vest  upon  the  recording 
of  the  minute  authorizing  said  issue  in  the  county  in  which  the  cor- 
poration was  created,  and  filing  an  exemplification  thereof  with  the 
Secretary  of  the  Commonwealth.  Thereafter  such  corporations  shall  be 
subject  to  the  same  taxation  as  corporations  for  profit." 

The  Act  of  May  23,  1887,  P.  L.  165,  provides  that  the  charter  may 
contain  a  provision  that  one-half  or  one-third  or  one-fourth  of  the 
board  of  directors  shall  be  elected  each  year.     See  infra,  note  28. 


CORPORATIOXS  33 

to  be  their  act  and  deed,  and  the  same  being  duly  certified 
under  the  hand  and  official  seal  of  the  said  recorder  of 
deeds  [or  a  notary  public  of  the  commonwealth  of  Penn- 
sylvania]-- shall  be  presented  to  a  law  judge  of  the  said 
county,  accompanied  by  proof  of  the  publication  of  the  no- 
tice of  such  application,  who  is  hereby  required  to  peruse  and 
examine  said  instrument,  and  if  the  same  shall  be  found  to 
be  in  the  proper  form,  and  within  the  purposes  named'in  the 
first  class  specified  in  the  foregoing  section,  and  shall  appear 
lawful  and  not  injurious  to  the  community,  he  shall  endorse 
thereon  these  facts,  and  shall  order  and  decree  thereon  that 
the  charter  is  approved,  and  that  upon  the  recording  of  the 
said  charter  and  order,  the  subscribers  thereto  and  their 
associates,  shall  be  a  corporation  for  the  purposes  and  upon 
the  terms  therein  stated,  and  the  said  order  and  charter  shall 
be  recorded  in  the  office  for  the  recording  of  deeds  in  and 
for  the  county  aforesaid,  and  from  thenceforth  the  persons 
named  therein  and  subscribing  the  same,  and  their  associ- 
ates and  successors,  shall  be  a  corporation  by  the  name 
therein  given.-^ 

CERTIFICATES  FOR  SECOND  CLASS. 

The  certificate  for  a  corporation  embraced  within  the 
second  class,  named  in  the  foregoing  section,  shall  set  forth 
all  that  is  hereinbefore  required  to  be  set  forth,  and  except 
building  and  loan  associations,  shall  also  state  that  ten  per 
centum  of  the  capital  stock  thereof  has  been  paid  in  cash 
to  the  treasurer  of  the  intended  corporation,  and  the  name 
and  residence  of  such  treasurer  shall  be  therein  given.  The 
same  shall  be  acknowledged  by  at  least  three  of  the  sub- 
scribers thereto,  before  the  recorder  of  deeds  of  the  coimty 


"■  For  the  provision  in  brackets  see  Act  of  April  25,  1891,  P.  L.  18. 

"  By  the  Act  of  February  20,  1854.  P.  L.  90,  the  Court,  in  granting  a 
charter  of  incorporation  for  any  purpose,  is  required  "to  limit  the 
yearly  income  of  such  corporation,  other  than  from  real  estate,  to  such 
sums  as  in  the  opinion  of  the  Court  will  not  be  injurious  or  prejudicial 
to  the  community."  The  better  practice  is  to  set  forth  in  the  certificate 
itself  the  limit  of  the  income.  In  re  IMiddletown  v.  Country  Club,  30 
Pa.  C.  C.  174,  1904. 


34  PENNSYLVANIA  ASSOCIATION  ACTS 

in  which  the  chief  operations  are  to  be  carried  on,  or  in 
which  the  principal  office  is  situated  [or  a  notary  pubhc  of 
the  commonweahh  of  Pennsylvania],-^  and  they  shall  also 
make  and  subscribe  an  oath  or  affirmation  before  him,  to 
be  endorsed  on  the  said  certificate,  that  the  statements 
contained  therein  are  true.  The  said  certificate,  accom- 
panied with  proof  of  publication  of  notice  as  herein- 
before provided,  shall  then  be  produced  to  the  governor 
of  this  commonwealth,  who  shall  examine  the  same,  and 
if  he  find  it  to  be  in  proper  form  and  within  the  purposes 
named  in  the  second  class,  specified  in  the  foregoing 
section,  he  shall  approve  thereof  and  endorse  his  approval 
thereon,  and  direct  letters  patent  to  issue  in  the  usual 
form,  incorporating  the  subscribers  and  their  associates 
and  successors  into  a  body  politic  and  corporate,  in  deed 
and  in  law,  by  the  name  chosen,  and  the  said  certificate 
shall  be  recorded  in  the  office  of  the  secretary  of  the  com- 
monwealth, in  a  book  to  be  by  him  kept  for  that  purpose, 
and  he  shall  forthwith  furnish  to  the  auditor  general  an 
abstract  therefrom,  showing  the  name,  location,  amount  of 
capital  stock,  and  name  and  address  of  the  treasurer  of 
such  corporation.  •  The  said  original  certificate,  with  all  of 
its  endorsements,  shall  then  be  recorded  in  the  office  for  the 
recording  of  deeds,  in  and  for  the  county  where  tlie  chief 
operations  are  to  be  carried  on,  and  from  thenceforth  the 
subscribers  thereto,  and  their  associates  and  successors,  shall 
be  a  corporation,  for  the  purposes  and  upon  the  terms  named 
in  the  said  charter.  Certified  copies  of  both  the  records 
thereof  and  of  the  charters  of  the  corporations  named  in 
the  first  class  specified  in  the  foregoing  section,  shall  be 
competent  evidence  for  all  purposes  in  the  courts  of  this 
commonwealth.  The  secretary  of  the  commonwealth  shall 
charge  and  receive  a  fee  of  five  dollars  upon  every  paper 
relating  to  a  corporation  filed  or  recorded  in  his  office. 

■*  See,  supra,  note  22.  Query:  Whether  the  acknowledgment  before 
a  notary  must  be  in  the  county  where  the  chief  operations  are  carried 
on,  or  in  which  the  principal  office  is  situated? 

In  view  of  the  Act  of  April  23,  1903.  supra,  note  20,  a  corporation 
for  profit  formed  by  three  persons,  would  only  have  to  be  subscribed 
and  acknowledged  by  two  persons. 


CORPORATIONS  35 

LENGTH  OF  GRANT POWER  TO  REVOKE. 

Section  4.  The  charters  for  incorporations  named  in 
this  act  may  be  made  perpetual,  or  may  be  Hmited  in  time 
by  their  own  provisions;  and  the  general  assembly  reserves 
the  power  to  revoke  or  annul  any  charter  of  incorporation 
granted  or  accepted  under  the  provisions  of  this  act,  when- 
ever in  the  opinion  of  the  said  general  assembly  it  iijay  be 
injurious  to  the  citizens  of  this  commonwealth,  in  such 
manner,  however,  that  no  injustice  shall  be  done  to  the 
corporators  or  their  successors. 

GOVERNOR    TO    ISSUE    LETTERS    PATENT. 

[Upon  the  application  of  the  president  and  secretary  of 
any  corporation  heretofore  or  hereafter  created  under  any 
general  or  special  law  of  this  commonwealth,  accompanied 
by  due  proof  that  said  corporation  has  complied  with  all 
the  conditions  provided  by  law  and  the  constitution  to  en- 
able it  to  have  a  corporate  existence  and  transact  business, 
it  shall  be  lawful  for  the  governor  to  issue  letters  patent 
under  the  great  seal  of  the  commonwealth,  in  such  form  as 
he  may  prescribe,  to  such  corporation,  declaring  it  to  be 
and  erecting  it  into  a  body  corporate  or  politic  in  deed  and 
in  law.]-^ 

BY-LAWS. 

Section  5.  The  by-laws  of  every  corporation  created 
under  the  provisions  of  this  statute,  or  accepting  the  same, 
shall  be  deemed  and  taken  to  be  its  law,  subordinate  to  this 
statute,  the  charter  of  the  same,  the  constitution  and  laws 
of  this  commonwealth,  and  the  constitution  of  the  United 
States.  They  shall  be  made  by  the  stockholders  or  mem- 
bers of  the  corporation,  at  a  general  meeting  called  for 
that  purpose,  unless  the  charter  prescribes  another  body,  or 
a  different  mode.  They  shall  prescribe  the  time  and  place 
of  meeting  of  the  corporation,  the  powers  and  duties  of  its 

^^Act   of    May    15,    1874,    P.    L.    186.      It   was    not   an    amendment 
or  supplement  to  the  Act  of  1874. 


36  PENNSYLVANIA  ASSOCIATION  ACTS 

officials,  and  such  other  matters  as  may  be  pertinent  and 
necessary  for  the  business  to  be  transacted,  and  may  con- 
tain penalties  for  the  breach  thereof,  not  exceeding  twenty 
dollars. 

OFFICERS    AND    THEIR    DUTIES. 

The  business  of  every  corporation  created  hereunder, 
or  accepting  the  same,  shall  be  managed  and  conducted 
by  a  president,  a  board  of  directors  or  trustees,  a  secretary 
or  clerk,  a  treasurer,  and  such  other  officers,  agents  and 
factors  as  the  corporation  authorizes  for  that  purpose,  and 
nothing  in  any  lazv  contained  shall  prevent  or  he  construed 
to  prohibit  the  vice  president,  treasurer,  solicitor,  or  other 
officer  of  any  corporation  organized  or  existing  under  this 
act,  from  being  a  director  of  such  company  and  receiving  at 
the  same  time  such  compensation  for  his  services  as  such 
officer  as  the  board  of  directors  of  such  company  may  direct. 
The  directors  or  trustees  shall  be  chosen  annually  by  the 
stockholders  or  members,  at  the  time  fixed  by  the  by-laws, 
and  shall  hold  their  office  until  others  are  chosen  and  quali- 
fied in  their  stead;  the  manner  of  such  choice,  and  of  the 
jhoice  or  appointment  of  all  other  agents  and  officers  of  the 
company  shall  be  prescribed  by  the  by-laws.  The  number 
of  directors  or  trustees  shall  not  be  less  than  three;  one  of 
them  shall  be  chosen  president  by  the  directors,  or  by  the 
m.embers  of  the  corporation,  as  the  by-laws  shall  direct. 
The  members  of  said  corporation  may,  at  a  meeting  to  be 
called  for  that  purpose,  determine,  fix  or  change  the  num- 
ber of  directors  or  trustees  that  shall  thereafter  govern  its 
affairs,  and  a  majority  of  the  whole  number  of  such  direc- 
tors or  trustees  shall  be  necessary  to  constitute  a  quorum. 
The  secretary  or  clerk  shall  be  sworn  and  shall  record  all 
the  votes  of  the  corporation  and  the  minutes  of  its  transac- 
tions in  a  book  to  be  kept  for  that  purpose.  The  treasurer 
shall  give  bond  in  such  sum,  and  with  such  sureties,  as 
shall  be  required  by  the  by-laws  for  the  faithful  discharge 
of  his  duties,  and  he  shall  keep  the  moneys  of  the  corpora- 
tion in  a  separate  book  account  to  his  credit  as  treasurer, 


CORPORATIONS  17 

and  if  he  shall  neglect  or  refuse  so  to  do,  he  shall  be  liable 
to  a  penalty  of  fifty  dollars  for  every  day  he  shall  fail  to 
do  so,  to  be  recovered  at  the  siut  of  any  informer  in  an 
action  of  debt.-^ 

PLACE   OF   ANNUAL    MEETING. 

[It  shall  be  lawful  for  any  corporation  of  this  State, 
now  existing  or  hereafter  created,  to  change  the  location  of 
its  principal  office,  the  place  of  its  annual  and  other  meet- 
ings of  stockholders,  or  the  time  for  holding  such  annual 
meetings,  or  either,  or  all,  by  resolution  of  its  board  of  di- 
rectors, adopted  by  a  two-thirds  vote  thereof,  approved  at 
any  annual  meeting  or  special  meeting  duly  called  of  the 
stockholders,  by  a  two-thirds  vote  thereof.  Upon  such  ap- 
proval of  the  stockholders,  it  shall  be  the  duty  of  the  presi- 
dent of  such  corporation  to  file  in  both  the  offices  of  the 
Secretary  of  the  Commonwealth  and  the  Auditor  General 
of  this  Commonwealth  a  report,  under  the  seal  of  the  com- 
pany, specifying  the  change  or  changes  so  made.  Nothing 
in  this  act,  however,  shall  authorize  the  location  of  the 
principal  office  or  the  holding  of  the  annual  or  other  meet- 
ings of  stockholders  outside  of  the  limits  of  this  Common- 
wealth. J^^ 

PART  OF  BOARD   MAY  BE   ELECTED  ANNUALLY. 

[Whenever  the  stockholders  of  any  corporation  incor- 
porated under  the  act  of  April  twenty-ninth,  one  thousand 
eight  hundred  and  seventy-four,  or  any  other  law  of  this 

^'The  parts  printed  in  italics  were  added  by  the  Act  of  May  14,  1891, 
P.  L.  61. 

"Act  of  June  8,  1893,  P-  L.  355.  It  is  not  an  amendment  or  supple- 
ment to  the  Act  of  1874.  The  Act^  of  February  6,  1830,  Section  2, 
P.  L.  42,  and  May  31,  1887,  P.  L.  281,  as  far  as  they  relate  to  changing 
the  time  of  the  annual  meeting,  are  superseded  by  this  act.  The  Act  of 
1830.  supra,  gives  to  the  directors  or  trustees  the  power  to  change  by  a 
two-thirds  vote  the  times  of  their  own  meetings. 

By  the  Act  of  November  27.  1865.  See  Pamphlet  Laws  for  t866.  p. 
1228,  provides  that  where  the  majority  of  the  directors  or  stockholders 
are  citizens  of  other  States  all  meetings  may  be  held  out  of  the  State, 
provided  that  the  annual  meeting  for  the  election  of  officers  be  held 
within  the   State. 


38  PENNSYLVANIA  ASSOCIATION  ACTS 

Commonwealth,  shall,  at  a  meeting  called  for  the  purpose, 
decide,  by  a  majority  vote  of  those  present  either  in  person 
or  by  prox}',  to  elect  a  portion  of  their  directors  for  a  term 
or  terms  longer  than  one  year,  it  may  and  shall  be  lawful 
for  such  corporation,  at  the  next  ensuing  election,  to  divide 
the  directors  or  managers,  which  are  to  be  chosen,  into  two, 
three  or  four  classes,  and  to  elect  the  first  class  to  serve  for 
the  term  of  one  year,  and  the  second,  third  or  fourth  to 
serve  for  two,  three  or  four  years,  respectively,  and  at  all 
ensuing  elections  of  said  corporations,  the  stockholders 
shall  only  elect  the  number  of  directors  necessary  to  take 
the  place  of  those  whose  term  of  office  shall  then  expire, 
and  such  directors  shall  be  elected  for  the  longest  term  for 
which  any  class  may  have  been  elected  as  hereinbefore  pro- 
vided. J^s 

NUMBER   OF  DIRECTORS. 

[In  all  corporations  heretofore  or  hereinafter  incor- 
porated under  the  laws  of  this  Commonwealth,  and  in  all 
foreign  corporations  heretofore  or  hereafter  domesticated 
under  the  laws  of  this  Commonwealth,  the  board  of  direc- 
tors may  consist  of  any  number  of  persons  not  less  than 
three.  The  number  of  directors  may  be  increased  or 
diminished,  from  time  to  time,  by  the  stockholders  of  any 
such  corporations,  at  any  regular  annual  meeting  or  at  any 
special  meeting  called  for  that  purpose,  of  which  notice 
shall  be  given  as  required  by  the  by-laws ;  and  it  shall  be 
lawful  for  any  such  corporation,  by  its  by-laws,  to  authorize 
the  board  of  directors  to  increase  or  decrease  the  number 
of  the  directors  from  time  to  time  without  a  vote  of  the 
stockholders.]^® 


"^Act  of  June  17,  1887,  Section  i.  P.  L.  411,  a  supplement  to  the 
Act  of  1874.     See  note  21,  supra. 

^°Act  of  April  19,  1901,  P.  L.  80.  It  is  not  an  amendment  or  sup- 
plement to  the  Act  of  1874. 

The  Act  of  May  31,  1887,  P.  L.  281,  provides  :  "It  shall  be  lawful 
*  *  *  for  any  corporation  *  *  *  ^o  determine  by  a  vote  of  its 
stockholders,    holding    a    majority    in    interest    of    all    its    stock,    at    a 


CORPORATIONS  39 

QUORUM  OF  STOCKflOLDERS. 

Section  6.  Every  such  corporation  may  determine,  by 
its  by-laws,  what  number  of  stockholders  shall  attend,  either 
in  person  or  by  proxy,  or  what  number  of  shares  or  amount 
of  interest  shall  be  represented  at  any  meeting  to  constitute 
a  quorum;  if  the  quorum  is  not  so  determined,  a  majority 
in  interest  of  the  stockholders  shall  constitute  a  quorum. 

CERTIFICATES  OF  STOCK. 

Section  7.  [Any  stockholder  of  any  company  incor- 
porated under  the  laws  of  this  Commonwealth  shall  be 
entitled  to  receive  a  certificate  of  the  number  of  shares 
standing  to  his,  her  or  their  credit  on  the  books  of  the 
corporation,  which  certificate  shall  be  signed  by  the  presi- 
dent or  vice-president  or  other  officer  designated  by  tlie 
board  of  directors,  countersigned  by  the  treasurer  and 
:iealed  with  the  common  seal  of  the  corporation,  which 
certificate  or  evidence  of  stock  ownership  shall  be  trans- 
ferable on  such  books  at  the  pleasure  of  the  holder,  in 
person  or  by  attorney,  duly  authorized  as  the  by-laws  may 
prescribe,  subject,  however,  to  all  payments  due  or  to 
become  due  thereon;  and  the  assignee  or  party  to  whom 
the  same  shall  have  been  so  transferred  shall  be  a  mem- 
ber of  said  corporation  and  have  and  enjoy  all  the   im- 


meeting  duly  called  for  the  purpose  *  *  *  the  number  of  directors 
that  shall  hereafter  govern  its  affairs." 

The  Act  of  April  15,  1869,  P.  L.  29.  provides:  "Whenever  the  num- 
ber of  directors  or  managers  of  any  corporation  may  be  increased 
under  authority  of  law,  a  majority  of  the  whole  number  shall  be 
necessary  to  constitute  a  quorum." 

The  Act  of  March  31,  i860.  Section  66,  P.  L.  382.  prohibits  any 
director,  trustee,  etc.,  of  any  corporation  from  being'  a  salaried  officer 
of  the  corporation  subordinate  to  the  president  or  directors.  But  the 
.^ct  of  May  20,  1891,  P.  L.  loi,  permits  a  director  of  "any  trust,  deposit. 
or_  other  purely  private  or  business  corporation."  to  serve  as  such  sal- 
aried officer.  The  words  "purely  private"  would  seem  to  exclude  public 
service  corporations,  and  manv  corporations  of  the  fir«;t  class 

The  Act  of  March  31,  i860.  Section  67,  P.  L.  7S2.  makes  void  anv 
contract  with  a  corporation  for  supplies  or  materials  where  the  other 
^■^nll  tlt'f  T  any  officer  of  the  company  a  reward  to  induce  him  to 
iake  the  contract.  The  person  giving  the  reward  is  iruilty  of  a  misde- 
meanor. "  J    '-'L    a   111I3UC 


40  PEXXSYLVAXIA  ASSOCIATION  ACTS 

munities,  privileges  and  franchises  and  be  subject  to  all 
of  the  liabilities,  conditions  and  penalties  incident  thereto, 
in  the  same  manner  as  the  original  subscriber  or  holder 
would  have  been.  And  upon  a  sale  of  such  stock  in  satis- 
faction of  any  debt  for  ivhich  it  is  pledged  the  purchaser 
shall  hare  the  right  to  conipcl  a  transfer  of  such  stock  upon 
the  corporation  books  aiui  the  delivery  of  a  proper  certifi- 
cate therefor.Y^ 

OATH    OF   OFFICERS    HOLDING    ELECTIONS. 

Section  8.  No  person  acting  as  judge  or  officer  hold- 
ing an  election  for  any  such  corporation,  shall  enter  on  the 
duties  of  his  office  or  appointment  until  he  take  and  sub- 
scribe an  oath  or  affirmation  before  a  judge,  alderman, 
justice  of  the  peace,  or  other  person  qualified  by  law  to  ad- 
minister oaths,  that  he  will  discharge  the  duties  of  his  office 
or  appointment  with  fidelity,  that  he  will  not  receive  any 
vote  but  such  as  he  verily  believes  to  be  legal ;  and  if  any 
such  judge  or  officer  shall,  knowingly  and  wilfully,  violate 
his  oath  or  affirmation,  he  shall  be  subject  to  all  the  penalties 
imposed  by  law  upon  the  officers  of  the  general  election  of 
this  commonwealth  violating  their  duties,  and  shall  be  pro- 
ceeded against  in  like  manner,  and  with  like  effect;  and  if 
any  election,  as  aforesaid,  be  held  without  the  person  holding 
the  same  having  first  taken  an  oath  or  affirmation,  as  afore- 
said, or  be  invalid  for  any  other  reason,  such  election  shall 
be  set  aside  in  the  manner  now  provided  by  law,  and  a  new 
election  ordered  by  the  court  of  common  pleas  of  the  proper 
county,  upon  the  petition  of  not  less  than  five  stockliolders 
supported  by  proof  satisfactory  to  said  court. 


^"This  is  the  Act  of  June  24.  1895,  P.  L.  258.  It  is  not  in  terms  an 
amendment  or  supplement  of  Section  7  of  the  Act  of  1874.  The  lan- 
guage is  somewhat  different,  but  the  part  printed  in  italics  is  the  only 
part  which  is  new. 

The  Act  of  1874,  after  the  words  "in  the  same  manner  as  the  orig- 
inal subscriber  or  holder  would  have  been,"  added  "but  no  certificate 
shall  be  transferred  so  long  as  the  holder  thereof  is  indebted  to  said 
company,  unless  the  board  of  directors  shall  consent  thereto."  Query, 
whether  this  proviso  is  still  in  force  .^ 


CORPORATIONS  41 


VACANCIES. 


Section  9.  In  case  of  the  death,  removal,  or  resigna- 
tion of  the  president  or  any  of  the  directors,  treasurer  or 
other  officer  of  any  such  company,  the  remaining  directors 
may  supply  the  vacancy  thus  created  until  the  next  election. 

CUMULATIVE  VOTING. 

Section  10.  In  all  elections  for  directors,  managers  or 
trustees  of  any  corporation  created  under  the  provisions  of 
this  statute,  or  accepting  its  provisions,  each  member  or 
stockholder  or  other  person  having  a  right  to  vote,  may  cast 
the  whole  number  of  his  votes  for  one  candidate,  or  dis- 
tribute them  upon  two  or  more  candidates  as  he  may  prefer, 
that  is  to  say:  If  the  said  member  or  stockholder  or  other 
person  having  a  right  to  vote,  own  one  share  of  stock  or  has 
one  vote,  or  is  entitled  to  one  vote  for  each  of  six  directors 
by  virtue  thereof,  he  may  give  one  vote  to  each  of  said  six 
directors,  or  six  votes  for  any  one  thereof,  or  a  less  number 
of  votes  for  any  less  number  of  directors,  zvhatever  max  be 
the  actual  niimher  to  he  elected,  and  in  this  manner  may  dis- 
tribute or  cumulate  his  votes  as  he  may  see  fit ;  all  elections 
for  directors  or  trustees  shall  be  by  ballot,  and  every  share  of 
stock  shall  entitle  the  holder  thereof  to  one  vote,  in  person 
or  by  proxy,  to  be  exercised  as  provided  in  this  section. ^^ 


"  The  parts  printed  in  italics  were  added  by  the  Act  of  April  25, 
1876,  P.  L.  47. 

The  Act  of  May  26,  1893,  P.  L.  141,  provides  that  the  certificate  of 
stock  and  transfer  book,  or  either  shall  be  prima  facie  evidence  of  the 
right  to  vote.  Any  stockholder  may  object  that  the  registered  owner 
is  not  the  real  owner.  The  question  of  ownership  is  determined  sum- 
marily by  the  judge  of  election.  Executors,  administrators,  guardians 
or  trustees  created  by  last  will  or  testament,  or  by  decree  of  court, 
can  vote  the  stock  standing  in  the  name  of  the  decedent  [See  also,  Act 
of  March  16.  1905,  P.  L.  42].  In  other  cases,  the  beneficial  owner  is 
the  person  entitled  to  vote,  and  as  between  the  pledgor  and  pledgee, 
the  pledgor  is  the  person  entitled  except  where  by  written  agreement 
between  them  the  pledgee  has  that  right. 

The  Act  of  March  5,  1903,  P.  L.  14,  regulates  voting  bv  proxv; 
while  the  .Act  of  March  24.  1903.  P.  L.  qo,  provides,  under  certain 
conditions,  for  taking  a  stock  vote  on  any  question. 


42  PENNSYLVANIA  ASSOCIATION  ACTS 

CAPITAL  STOCK. 

Section  ii.  The  capital  stock  of  every  such  corpora- 
tion that  has  or  requires  a  capital  stock,  shall  consist  of  not 
more  than  one  million  dollars,^-  and  shall  be  divided  into 
shares  of  not  more  than  one  hundred  dollars  each;  and  all 
subscriptions  to  the  capital  stock  shall  be  paid  in  such  in- 
stalments and  at  such  times  as  the  directors  may  require,  and 
if  default  be  made  in  any  payment  the  person  or  persons 
in  default  shall  be  liable  to  pay,  in  addition  to  the  amount 
so  called  for  and  unpaid,  at  the  rate  of  one-half  of  one 
per  centum  per  month  for  the  delay  of  such  payment,  and 
the  directors  may  cause  suit  to  be  brought  for  the  recovery 
of  the  amount  due,  together  with  the  penalty  of  one-half 
of  one  per  centum  per  month  as  aforesaid,  or  the  directors 
may  cause  the  stock  to  be  sold  in  the  manner  provided  in 
clause  two  of  section  thirty-nine  of  this  act;  and  no  stock- 
holder shall  be  entitled  to  vote  at  any  elect'on,  or  at  any  meet- 
ing of  the  stockholders,  on  whose  share  or  shares  any  in- 
stalments or  arrearages  may  have  been  due  and  unpaid  for 
the  period  of  thirty  days  immediately  preceding  such  election 
or  meeting.  The  shares  of  the  capital  stock  of  every  such 
company  may  be  transferred  on  the  books  of  the  company, 
in  person  or  by  attorney,  subject  to  such  regulations  as  the 
by-laws  may  prescribe ;  but  the  provisions  of  this  section 
shall  not  apply  to  corporations  in  which  by  this  act  different 
and  other  rules  and  provisions  are  enacted  for  their  regu- 
lation and  government. 

Section  12.  The  stock  of  every  corporation  created 
vmder  the  provisions  of  this  statute  shall  be  deemed  personal 
property;  and  no  shares  shall  be  transferable  until  all  pre- 
vious calls  thereon  shall  have  been  fully  paid  in,  or  shall 
have  been  declared  forfeited  for  the  non-payment  of  calls 


'-  By  the  Act  of  May  9,  1889,  P.  L.  180,  water  companies  may  have 
a  capital  stock  of  two  millions. 

See,  however,  the  power  of  all  corporations  to  increase  their  capital 
stock  to  thirty  millions  of  dollars,  infra,  Section  i8,  as  effected  by  the 
Act  of  June  10,  1893,  P.  L.  417. 


CORPORATIONS  43 

thereon. ^^  No  note  or  obligation  given  by  a  stockholder, 
whether  secured  by  pledge  or  otherwise,  shall  be  considered 
as  a  payment  of  any  part  of  the  capital  stock.  It  shall  and 
may  be  lawful  for  any  corporation,  organized  under  the  pro- 
visions of  this  act  either  for  the  purpose  of  carrying  on  any 
manufacturing  business,  or  for  the  supply  of  water,  or  for 
the  manufacture  or  supplying  of  light,  to  subscribe  for,  take, 
purchase,  hold,  and  dispose  of  the  bonds  or  stock  in  any 
company  of  the  same  character  incorporated  under  the 
provisions  of  this  act  or  its  supplements,  or  guarantee  the 
payment  of  said  bonds  and  the  interest  thereon,  or  either 
principal  or  interest,  or  to  enter  into  contracts  for  the  use 
or  lease  of  the  corporate  property,  real,  personal  or  mixed, 
of  such  company,  upon  such  terms  as  may  be  agreed  upon 
with  the  company  or  companies  owning  the  same,  and  to 
run,  use  and  operate  such  property  in  accordance  with  such 
contract  or  lease.^^ 

POWER  TO   MORTGAGE. 

Section  13.  It  shall  be  lawful  for  all  corporations  to 
borrow  money  or  to  secure  any  indebtedness  created  by  them, 
by  issuing  bonds,  with  or  without  coupons  attached  thereto, 
and  to  secure  the  same  by  a  mortgage  or  mortgages  to  be 
given  and  executed  to  a  trustee  or  trustees,  for  the  use  of  the 
bondholders,  upon  their  real  estate  and  machinery,  or  on  their 
real  estate  alone,  to  an  amount  not  exceeding  one-half  of  the 
capital  stock  of  the  corporation  paid  in,  and  at  a  rate  of  in- 


^  The  Act  of  1874  at  this  point  provided :  "And  every  corporation 
may,  from  time  to  time,  at  a  legal  meeting  called  for  the  purpose, 
assess  upon  each  share  of  stock  such  sums  of  money  as  the  corpora- 
tion may  think  proper,  not  exceeding  in  the  whole  the  amount  at  which 
each  share  was  originally  limited :  and  such  sums  assessed  shall  be  paid 
to  the  treasurer  at  such  times  and  in  such  instalments  as  the  corpora- 
tion directs."  This  provision  was  struck  out  by  the  Act  of  May  2S. 
1887,^  P.  L.  273. 

^*  The  Act  of  1874  expressly  prohibited  the  purchase  of  stock 
of  other  corporations.  This  policv  was  reversed  bv  the  Act  of  Tune 
26,  1895,  P.  L.  .369.  The  Act  of  March  24.  1Q05,  P.  L.  56.  which  is 
substituted  in  the  text  for  the  12th  Section  of  the  Act  of ^1874,  is  the 
Act  of  1905,  with  the  addition  of  the  words  printed  in  italics. 


44  PENNSYLVANIA  ASSOCIATrON  ACTS 

terest  not  exceeding  six  per  centum :  Provided,  That  it  shall 
be  lazvfitl  for  siicJi  corporations  as  belong  to  the  classes 
named  in  clauses  four,  five,  six,  seven,  nine  and  eleven  of 
corporations  for  profit,  of  the  second  class,  as  set  forth  in 
section  two  of  the  act  of  zvhich  this  is  a  supplement,  and 
also  for  such  corporations  as  belong  to  the  class  named  in 
clause  tzventy-four,  section  tivo,  of  the  act  of  Assembly  ap- 
proved April  seventeenth,  one  thousand  eight  hundred  and 
seventy-six,  so  to  borrozv  money  and  so  to  secure  the  pay- 
ment of  the  same,  by  a  mortgage  or  mortgages  on  its  prop- 
erty and  franchises,  to  an  amount  not  exceeding  double  the 
amount  of  the  capital  stock  of  the  corporation  actually  paid 
in,  and  at  a  rote  of  interest  not  exceeding  six  per  centum, 
and  this  section  shall  not  be  construed  to  prevent  mortgages 
for  a  greater  amount  and  at  a  higher  rate  of  interest,  where 
the  power  to  make  the  same  is  expressly  given  by  the  terms 
of  this  statute  to  certain  classes  of  corporations,  or  is  con- 
tained in  the  charter  of  any  private  corporations  accepting 
this  act,  or  in  the  statutes  under  which  certain  other  classes 
thereof  are  by  the  provisions  of  this  statute  to  be  controlled, 
governed  and  managed. ^^ 

LIABILITY  OF  STOCKHOLDERS. 

Section  14.  The  stockholders  in  each  of  said  corpora- 
tions shall  be  liable,  in  their  individual  capacity,  to  the 
amount  of  stock  held  by  each  of  them,  for  all  work  or  labor 
done  to  carry  on  the  operations  of  each  of  each  of  [said] 
corporations;  but  this  section  shall  not  be  construed  to  in- 


^°The  parts  printed  in  italics  were  added  by  the  Act  of  May  21, 
1889.  P.  L.  257. 

The  Act  of  May  15,  1874,  Section  i,  P.  L.  186,  provided:  "It  shall 
and  may  be  lawful  for  any  corporation  existing  by  or  under  the  author- 
ity of  any  law  of  this  commonwealth,  which  shall  have  mortgaged 
any  part  of  its  estate,  corporate  property  and  franchises,  for  the  secur- 
ity of  all  or  any  portion  of  its  bonded  indebtedness,  to  mortgage  its 
remaining  estate,  corporate  property  and  franchises,  or  any  part  of 
the  same,  as  a  further  and  additional  security  for  the  same  bonded  in- 
debtedness: Provided  hoivcvcr.  That  no  lien  then  existing  upon  such 
remaining  estate,  property  and  franchises,  shall  be  thereby  impaired 
or  affected." 


CORPORA!  10  XS  45 

crease  or  diminish  the  Habihty  of  stockholders  in  corpora- 
tions which,  by  the  terms  of  this  statute,  are  to  be  gov- 
erned, controlled  and  managed  by  the  provisions  of  other 
statutes,  but  their  liability  shall  be  fixed  and  defined  by  the 
terms  of  the  statutes  by  which  said  corporations  are  to  be 
governed,  controlled  and  managed. ^*^ 

Section  15.  In  any  action  or  bill  in  equity,  brought  to 
enforce  any  liability  under  the  provisions  of  this  aet,  the 
plaintiff  may  include  as  defendants,  any  one  or  more  of  the 
stockholders  of  such  corporation,  claimed  to  be  liable  there- 
for; and  if  judgment  be  given  in  favor  of  the  plaintiff  for 
his  claim,  or  any  part  thereof,  and  any  one  or  more  of  the 
stockholders  so  made  defendants,  shall  be  found  to  be  liable, 
judgment  shall  be  given  against  him  or  them.  The  execu- 
tion upon  such  judgment  shall  be  first  levied  on  the  property 
of  such  corporation,  if  to  be  found  in  the  county  where  the 
chief  business  of  the  corporation  is  carried  on,  and  in  case 
such  property,  sufficient  to  satisfy  the  same,  cannot  be  found 
in  said  county,  the  deficiency,  or  so  much  thereof  as  the 
stockholder  or  stockholders,  defendants,  in  such  judgment, 
shall  be  liable  to  pay,  shall  be  collected  of  the  property  of 
such  stockholder  or  stockholders;  on  the  payment  of  any 
judgment  as  aforesaid,  or  any  part  thereof,  by  one  or  more 
stockholders,  the  stockholder  or  stockholders  so  paying  the 
same  shall  be  entitled  to  have  such  judgment,  or  so  much 
thereof  as  may  have  been  paid  by  him  or  them,  assigned  to 
him  or  them  for  his  or  their  benefit,  with  power  to  enforce 
the  same  in  manner  aforesaid,  first  against  the  company,  and 
in  case  the  amount  so  paid  by  him  or  them  shall  not  be  col- 
lected of  the  property  of  the  corporation,  then  ratably 
against  the  other  solvent  stockholders,  if  any  such  there  be, 
originally  liable  for  the  claim  on  which  such  judgment  was 
obtained ;  but  no  stockholder  shall  be  personally  liable  for 


^'  This  section  was  amended  by  the  Act  of  April  17,  1876.  Section 
3,  P.  L.  "^2.  The  section  as  it  stood  in  the  Act  of  1874  contained  the 
words  "or  materials"  after  the  words  "labor  done." 

The  statute  of  limitations  in  actions  to  enforce  the  liability  of 
stockholders  is  six  years.     See  Act  of  March  28.  1867,  P.  L.  48. 


46  PENNSYLVANIA  ASSOCIATION  ACTS 

payment  of  any  debt  contracted  by  any  such  corporation, 
unless  suit  for  the  collection  of  the  same  shall  be  brought 
against  such  stockholder  or  stockholders  within  six  months 
after  such  debt  shall  have  become  due.^''' 

PREFERRED   STOCK. 

Section  i6.  Every  corporation  created  under  the  pro- 
visions of  this  act,  or  accepting  its  provisions,  may,  with  the 
consent  of  a  majority  in  interest  of  its  stockholders,  obtain- 
ing at  a  meeting  to  be  called  for  that  purpose,  of  which  pub- 
lic notice  shall  be  given  during  thirty  days  in  a  newspaper  of 
the  proper  county,  issue  preferred  stock  of  the  corporation, 
the  holders  of  which  preferred  stock  shall  be  entitled  to 
receive  such  dividends  thereon  as  the  board  of  directors  of 
the  corporation  may  prescribe,  payable  only  out  of  the  net 
earnings  of  the  corporation.^^ 

PROPERTY    MAY   BE   TAKEN    FOR   STOCK DEFERRED   STOCK. 

Section  17.  Every  corporation  created  under  the  pro- 
visions of  this  act  or  accepting  its  provisions,  may  take  such 
real  and  personal  estate,  mineral  rights,  patent  rights  and 
other  property,  as  is  necessary  for  the  purposes  of  its  or- 
ganizations and  business,  and  issue  stock  to  the  amount  of 
the  value  thereof,  in  payment  thereof,  and  the  stock  so  issued 
shall  be  declared  and  taken  to  be  full  paid  stock,  and  not  lia- 
ble to  any  further  calls  or  assessments;  and  in  the  charter 
and  the  certificates  and  statements  to  be  made  by  the  sub- 
scribers and  officers  of  the  corporation,  such  stock  shall  not 
be  stated  or  certified  as  having  been  issued  for  cash  paid  into 
the  company,  but  shall  be  stated  or  certified  in  this  respect 


"  On  the  service  of  process  in  actions  brought  to  charge  the  stock- 
holders of  any  corporation  with  any  of  the  debts  of  such  corporations, 
or  to  enforce  payments  of  instalments  due  upon  stock,  see  Act  of  May 
14,  1874,  P.  L.  146. 

^' Under  the  Act  of  April  3,  1872,  P.  L.  Zl^  the  interest  on  the  pre- 
ferred stock  cannot  be  greater  than  twelve  per  cent.  Query,  whether 
this  provision  applies  to  an  increase  under  the  i6th  Section  of  the  Act 
of  1874?  The  Act  of  April  28,  1873,  P.  L.  79,  amends  the  Act  of  April 
3,  1872,  P.  L.  I',  by  permitting  preferred  stock  to  be  issued  in  classes. 


CORPORATIOXS  47 

according  to  the  fact ;  and  the  executors  or  adniinistrafors 
of  any  deceased  tenant  in  common  of  lands,  mines  and  min- 
eral rights  so  proposed  to  be  taken  may,  and  they  are  hereby 
authorized,  to  convey  the  individual  estate  and  interest  of 
such  decedent  therein  to  such  company,  receiving  therefor 
so  much  stock  in  such  company  as  the  said  decedent  zvould 
have  been  entitled  to  receive  in  his  lifetime,  to  be  held  in  the 
same  manner  as  the  lands :  Provided,  That  no  directions  or 
limitations  contained  in  any  last  will  and  testament  of  such 
decedent  sJiall  be  in  any  manner  interfered  with:  And  pro- 
vided. That  before  making  such  conveyance,  such  executors 
or  administrators  shall  give  sufficient  security,  to  be  ap- 
proved by  the  orphans'  court  having  jurisdiction  of  their 
accounts,  for  the  faithful  application  of  the  stock  received 
therefor;  no  such  corporation  shall  issue  either  bonds  or 
stock  except  for  money,  labor  done  or  money  or  property 
actually  received,  and  all  fictitious  increase  of  stock  or  in- 
debtedness in  any  form  shall  be  void ;  every  such  corporation 
may  provide  for  the  issue  of  deferred  stock  in  payment  for 
such  real  or  personal  estate  or  mineral  rights,  and  if  so  pro- 
vided, it  shall  be  expressly  stated  in  the  charter  filed,  or  in 
a  certificate  to  be  made  and  recorded,  or  in  the  accept- 
ance of  this  statute,  to  be  filed  by  any  corporation  accepting 
its  provisions,  with  the  amount  of  such  deferred  stock,  and 
the  consideration  of  the  same,  and  the  terms  on  which  the 
same  shall  be  issued;  and  the  said  stock  may  be  made  to 
await  payments  of  dividends  thereon,  until  out  of  the  net 
earnings  at  least  five  per  centum  has  been  declared  and  paid 
upon  the  other  full  paid  stock  of  the  corporation.^*^ 

INCREASE    OF    CAPITAL    STOCK. ^'^ 

[Section  i.  The  capital  stock  or  indebtedness,  or 
both,  of  any  corporation  created  by  general  or  special 
law    may,    with    the    consent    of    the    persons    or    bodies 


''The  words  printed  in  italics  were  added  by  the  Act  of  April  17. 
1876,  Section  4.  P.  L.  ^2. 

*"  This  was  the  subject  of   Sections   18-22  inclusive,  of  the  Act  of 


48  PENNSYLVANIA  ASSOCIATION  ACTS 

corporate  holding  the  larger  amount  in  value  of  its 
stock,  be  increased  to  such  an  amount  in  the  aggregate  of 
each,  without  regard  to  the  amount  of  the  other,  and  regard- 
less of  any  limitation  upon  the  amount  of  either,  prescribed 
in  any  general  or  special  law  regulating  any  such  corporation, 
as  it  shall  deem  necessary  to  accomplish  and  carry  on  and 
enlarge  the  business  and  purposes  of  such  corporation. 
Such  increase  of  either  may  be  made  at  once  or  from  time 
to  time,  as  the  majority  in  interest  of  the  stockholders  shall 
determine,  as  aforesaid ;  and  upon  the  authoridng  of  any 
such  increase  of  indebtedness  by  the  stockholders  of  such 
corporation,  in  the  manner  hereinafter  provided,  it  shall  he 
lawful  for  such  corporation  to  secure  the  payment  of  the 
principal  or  interest,  or  both,  of  all  or  any  part  of  sucJi 
indebtedness  by  mortgage,  deed  of  trust,  or  other  pledge 
or  conveyance,  by  zi'ay  of  security,  of  all  or  any  part  of 
its  real  and  personal  property,  rights,  privileges,  and  fran- 
chises, and  in  such  manner  and  upon  such  terms  as  its  board 
of  directors  may  determine.^'^ 

[Section  2.  That  any  corporation  desirous  of  increas- 
ing its  capital  stock  or  indebtedness,  or  both,  as  authorized 
by  this  act,  shall  by  resolution  of  its  board  of  directors, 
adopted  by  a  majority  of  the  entire  number  thereof,  declare 
such  purpose,  and  thereupon  by  resolution,  similarly 
adopted,  direct  that  the  question  of  such  proposed  increase 


1874,  which  is  now  superseded  bj'  Act  of  February  9,  1901.  See,  41 
ivfra.  Section  i8  provided  that  the  holders  of  the  larger  amount  in  value 
of  the  stock  could  increase  the  "capital  stock  or  indebtedness"  to  such  an 
amount  as  such  corporation  is  by  this  act  authorized  to  increase  its 
"capital  stock  or  indebtedness."  In  the  Act  of  1874  the  usual  limit  was 
two  millions,  though  special  kind  of  corporations,  as  mechanical,  min- 
ing, manufacturing,  or  other  business,  in  Clause  XVIII  of  the  second 
class,  could  have  a  capital  stock  of  five  millions,  while  the  real  estate 
companies  were  confined  to  a  capital  stock  of  two  hundred  thousand 
dollars.  The  Act  of  June  10,  1893,  P.  L.  417,  provided  that  any  cor- 
poration created  by  a  general  or  special  law  could  have  a  capital  stock 
not  exceeding  thirty  millions. 

"  This  and  the  next  three  sections  are  of  the  Act  of  February  9, 
1901,  P.  L.  3.  Section  i  has  been  amended  by  the  Act  of  April  22, 
1905,  P.  L.  280.  The  parts  printed  in  italics  were  added  by  the  amend- 
ing act. 


CORFORATIOXS  49 

shall  be  submitted  to  the  stockholders  of  such  corporation 
for  their  consent ;  either, 

(A).  At  any  prescribed  regular  annual  meeting  or 
adjournment  thereof,  the  notice  whereof,  stating  inter  alia 
that  such  subject  would  be  considered  thereat,  shall  have 
been  published  once  a  week  for  sixty  days  prior  to  such 
meeting  in  at  least  one  newspaper  published  in  the  county, 
city  or  borough  wherein  the  chief  office  or  place  of  business 
of  the  corporation  is  situate.  At  said  meeting  the  question 
shall  be  submitted  to  the  stockholders,  and  it  shall  be  the  duty 
of  the  president  and  secretary  of  said  meeting,  by  such 
agencies  or  methods  as  to  them  may  seem  meet,  to  ascer- 
tain whether  the  persons  and  bodies  corporate  holding  the 
larger  amount  in  value  of  the  stock  of  said  corporation  shall 
have  consented  to  such  increase,  and  upon  being  so  satis- 
fied to  certify  in  duplicate  the  fact,  under  oath  duly  adminis- 
tered :  Provided,  That  should  a  stock  vote  be  duly  demanded 
at  said  meeting,  it  shall  be  the  duty  of  the  president  and 
secretary,  in  ascertainment  of  the  fact  of  the  consent,  to 
cause  such  vote  to  be  taken  at  the  same  time  and  place, 
by  the  same  persons  and  in  the  same  manner,  as  the  vote 
for  directors  or  managers  of  such  corporation  shall  be 
taken;  or, 

(B).  At  a  special  meeting  of  the  stockholders,  notice 
of  the  time,  place  and  object  of  which  shall  have  been  pub- 
lished once  a  week  for  sixty  days  prior  to  said  meeting  in  at 
least  one  newspaper  published  in  the  county,  city  or  borough 
wherein  such  office  or  place  of  business  is  situated.  At 
such  meeting  thus  called,  or  any  adjournment  thereof,  an 
election  of  the  stockholders  shall  be  taken  for  or  against 
such  increase,  which  shall  be  conducted  by  three  judges, 
stockholders  of  such  corporation,  appointed  by  the  board 
of  directors  to  hold  said  election,  and  if  one  or  more  of  said 
judges  be  absent  the  judge  or  judges  present  shall  appoint 
a  judge  or  judges  who  shall  act  in  the  place  of  the  judge 
or  judges  absent;  and  said  judges  shall  respectively  take 
and  subscribe  an  oath  or  affirmation  before  an  officer  author- 


50  PENNSYLVANIA  ASSOCIATION  ACTS 

ized  by  law  to  administer  the  same,  well  and  truly  and 
according  to  law  to  conduct  such  election  to  the  best  of  their 
ability;  and  the  said  judges  shall  decide  upon  the  qualifica- 
tions of  voters,  and  when  the  election  is  closed  count  the 
number  of  shares  voted  for  and  against  such  increase,  and 
declare  whether  the  persons  and  bodies  corporate  holding 
the  larger  amount  of  the  stock  of  such  corporation  have 
consented  to  such  an  increase  or  refused  to  consent  thereto, 
and  shall  make  out  duplicate  returns  of  said  election,  stating 
the  number  of  shares  of  stock  that  voted  for  such  increase 
and  the  number  that  voted  against  such  increase,  and  sub- 
scribe and  deliver  the  same  to  one  of  the  chief  officers  of 
said  company.  Each  ballot  shall  have  endorsed  thereon  the 
number  of  shares  thereby  represented,  but  no  share  or 
shares  transferred  within  sixty  days  shall  entitle  the  holder 
or  holders  thereof  to  vote  at  such  election  or  meeting;  nor 
shall  any  proxy  be  received,  or  entitle  the  holder  to  vote,  un- 
less the  same  shall  bear  date  and  have  been  executed  within 
four  months  next  preceding  such  election  or  meeting;  and 
it  shall  be  the  duty  of  such  corporation  to  furnish  the  judges, 
at  said  meeting,  with  a  statement  of  the  amount  of  its  capital 
stock,  with  the  names  of  persons  or  bodies  corporate  hold- 
ing the  same,  and  number  of  shares  by  each  respectively 
held,  which  statement  shall  be  signed  by  one  of  the  chief 
officers  of  such  corporation,  with  an  affidavit  thereto  an- 
nexed that  the  same  is  true  and  correct  to  the  best  of  his 
knowledge  and  belief. 

[Section  3.  That  it  shall  be  the  duty  of  such  corpora- 
tion, if  consent  is  given  to  such  increase,  to  file  in  the  Office 
of  the  Secretary  of  the  Commonwealth,  within  thirty  days 
after  such  election,  one  of  the  copies  of  the  certificates  of  the 
president  and  secretary  of  the  annual  meeting,  or  one  of 
the  copies  of  the  return  of  such  election  at  the  special  meet- 
ing hereinbefore  provided  for,  with  a  copy  of  the  resolution 
and  notice  calling  the  same  thereto  annexed ;  and  thereafter 
the  increase  may  be  made  at  such  time  or  times  as  shall 
be  determined  by  the  directors.     Upon  the  actual  increase 


CORPORATIONS  51 

of  the  capital  stock  or  indebtedness  of  such  corporation, 
made  pursuant  thereto,  it  shall  be  the  duty  of  the  president 
or  treasurer  of  such  corporation,  within  thirty  days  there- 
after, to  make  a  return  to  the  Secretary  of  the  Common- 
wealth, under  oath,  of  the  amount  of  such  increase  actually 
made,  and  concurrently  therewith  such  corporation  shall  pay 
to  the  State  Treasurer,  for  the  use  of  the  Commonwealth, 
such  bonus  on  the  actual  increase  shown  by  said  return  as 
shall  then  be  prescribed  by  law.  In  case  of  neglect  or  omis- 
sion to  make  said  return,  such  corporation  shall  be  subject 
to  a  penalty  of  five  thousand  dollars,  in  addition  to  tlic 
bonus,  which  penalty  shall  be  collected  on  an  account 
settled  by  the  Auditor  General  and  State  Treasurer  as  ac- 
counts for  taxes  due  the  Commonwealth  are  settled  and 
collected ;  and  the  Secretary  of  the  Commonwealth  shall 
cause  said  return  to  be  recorded  in  a  book  for  that  purpose 
and  furnish  a  copy  of  the  same  to  the  Auditor  General. 

[Section  4.  Nothing  in  this  act  contained  shall  be  con- 
strued as  compelling  resort  to  the  process  herein  provided 
in  the  case  of  indebtedness  contracted  in  the  usual  course  of 
corporation  business.  All  acts  and  parts  of  acts  inconsist- 
ent with  the  provisions  of  this  act  are  hereby  repealed :  Pro- 
vided, however.  That  any  proceeding  for  increase  of  capital 
stock  or  indebtedness,  begun  under  existing  law  prior  to  and 
not  completed  at  the  date  this  act  becomes  effective,  shall  be 
consummated  under  the  authority  of  this  act  if  the  ante- 
cedent proceeding  shall  have  conformed  to  its  require- 
ments; but  if  such  antecedent  proceeding  shall  not  have 
so  conformed,  then  the  proceeding  shall  be  consummated 
under  the  provisions  of  the  law  existing  prior  to  the  passage 
of  this  act:  Provided,  however,  That  the  provisions  of  this 
act  shall  inure  to  the  benefit  of  any  railroad,  canal  or 
other  transportation  corporation,  unless  such  railroad,  canal 
or  other  transportation  corporation  shall,  before  claiming 
or  using  the  benefits  of  this  act,  file  in  the  office  of  the 
Secretary  of  the  Commonwealth  an  acceptance  of  all  the 
provisions  of  article  seventeen  of  the  Constitution  of  this 


52  PENNSYLVANIA  ASSOCIATION  ACTS 

Commonwealth,  which  acceptance  shall  be  made  by  resolu- 
tion adopted  at  a  regular  or  called  meeting  of  the  directors, 
trustees  or  other  proper  officers  of  such  railroad,  canal  or 
other  transportation  corporation,  certified  under  the  seal  of 
the  corporation,  and  a  copy  of  which  resolution,  certified 
under  the  seal  of  the  Office  of  the  Secretary  of  the  Common- 
wealth, shall  be  evidence  for  all  purposes.  ]"*- 

CAPITAL    STOCK    MAY   BE    REDUCED. ^^ 

[Section  i.  The  capital  stock  of  any  corporation  cre- 
ated b\  general  or  special  lazu  may  be  reduced,  from  time  to 
time,  by  the  consent  of  the  persons  or  bodies  corporate  hold- 
ing the  larger  amount  in  value  of  the  stock  of  such  corpora- 
tion, provided  that  such  reduction  shall  not  be  below  the 
minimum  amount  of  capital  stock  required  by  law  for  the 
formation  of  corporations  formed  for  similar  purposes.^"^ 

[Section  2.  That  any  corporation  desirous  of  reducing 
its  capital  stock  as  provided  by  this  act  shall,  by  a  reso- 
lution of  its  board  of  directors,  call  a  meeting  of  its  stock- 
holders therefor,  which  meeting  shall  be  held  in  its  chief 
office  or  place  of  business  in  this  Commonwealth,  and  notice 
of  the  time,  place  and  object  of  said  meeting  shall  be  pub- 
lished once  a  week  for  sixty  days  prior  to  such  meeting  in  at 
least  one  newspaper  published  in  the  county,  city  or  bor- 
ough wherein  such  office  or  place  of  business  is  situate. 


"The  Act  of  April  18,  1874,  P.  L.  61.  also  provided  for  an  increase 
in  capital  stock.  Section  6  of  this  act  requires  that,  when  requested  by 
the  Auditor  General,  a  report  of  the  amount  of  the  increase  "issued 
pursuant  to  the  provisions  of  this  Act"  shall  be  rendered. 

"  Provision  for  the  reduction  of  capital  stock  was  made  in  Section 
23  of  the  Act  of  1874.  This  section  was  amended  by  the  Act  of  April 
17.  1876.  Section  5.  P.  L.  Ti;^.  The  amendment  added  a  provision  for 
the  sale  of  the  property  and  franchises  of  a  corporation,  but  followed 
the  language  of  the  Act  of  1874  in  dealing  with  the  reduction  of 
stock.  The  Act  of  June  8.  1893,  P.  L.  351,  which  is  printed  in  the  text, 
while  it  did  not  in  terms  repeal  that  part  of  Section  23  of  the  Act  of 
1874  which  relates  to  reduction  of  stock,  completely  supplies  its  place. 
The  first  section  of  the  Act  of  1893  was  itself  amended  by  the  Act  of 
April  22,  1905,  as  noted  infra. 

*^This  and  the  next  four  sections  is  the  Act  of  June  8.  1893,  P.  L. 
3?T.  The  first  section  was  amended  by  the  Act  of  April  22,  1905,  P.  L. 
264.    The  words  printed  in  italics  were  added  by  the  amending  act. 


CORPORATIONS  53 

[Section  3.  At  the  meeting  called  pursuant  to  the  sec- 
ond section  of  this  act,  an  election  of  the  stockholders  of 
such  corporation  shall  be  taken  for  or  against  such  reduc- 
tion, which  shall  be  conducted  by  three  judges,  stockholders 
of  said  corporation,  appointed  by  the  board  of  directors 
to  hold  said  election,  and  if  one  or  more  of  said  judges  be 
absent,  the  judge  or  judges  present  shall  appoint  a  judge  or 
judges  who  shall  act  in  the  place  of  the  judge  or' judges 
absent,  and  who  shall  respectively  take  and  subscribe  an 
oath  or  affirmation  before  an  officer  authorized  by  law  to 
administer  the  same  well  and  truly  and  according  to  law,  to 
conduct  such  elections  to  the  best  of  their  ability,  and  the 
said  judges  shall  decide  upon  the  qualification  of  voters,  and 
when  the  election  is  closed,  count  the  number  of  shares  voted 
for  and  against  such  reduction,  and  declare  whether  the  per- 
sons or  bodies  corporate  holding  the  larger  amount  of  the 
stock  of  such  corporation  have  consented  to  such  reduction 
or  refused  to  consent  thereto,  and  shall  make  out  duplicate 
returns  of  said  election,  stating  the  number  of  shares  of 
stock  that  voted  for  such  reduction  and  the  number  that 
voted  against  such  reduction,  and  subscribe  and  deliver  the 
same  to  one  of  the  chief  officers  of  said  company. 

[Section  4.  Each  ballot  shall  have  endorsed  thereon 
the  number  of  shares  thereby  represented,  but  no  share 
or  shares  transferred  within  sixty  days  shall  entitle  the 
holder  or  holders  thereof  to  vote  at  such  election  or  meeting, 
nor  shall  any  proxy  be  received  or  entitle  the  holder  to  vote 
unless  the  same  shall  bear  date  and  have  been  executed 
within  three  months  next  preceding  such  election  or  meet- 
ing, and  it  shall  be  the  duty  of  such  corporation  to  furnish 
the  judges  at  said  meeting  with  a  statement  of  the  amount 
of  its  capital  stock  with  the  names  of  persons  or  bodies 
corporate  holding  the  same,  and  number  of  shares  by  each 
respectively  held,  which  statement  shall  be  signed  by  one  of 
the  chief  officers  of  such  corporation  with  an  affidavit 
thereto  annexed  that  the  same  is  true  and  correct  to  the  best 
of  his  knowledge  and  belief. 


54  PENNSYLVANIA  ASSOCIATION  ACTS 

[Sf.ction  5.  That  it  shall  be  the  duty  of  such  corpora- 
tion, if  consent  is  given  to  such  reduction,  to  file  in  the 
office  of  the  Secretary  of  the  Commonwealth,  within  thirty 
days  after  such  election  or  meeting,  one  of  the  copies  of  the 
return  of  such  election  provided  for  by  the  third  section 
of  this  act  with  a  copy  of  the  resolution  and  notice  calling 
the  same  thereto  annexed,  and  upon  the  reduction  of  the 
capital  stock  of  such  corporation  made  pursuant  thereto,  it 
shall  be  the  duty  of  the  president  or  treasurer  of  such  cor- 
poration, within  thirty  days  thereafter,  to  make  a  return  to 
the  Secretary  of  the  Commonwealth,  under  oath,  of  the 
amount  of  such  reduction,  and  in  case  of  neglect  or  omis- 
sion so  to  do,  such  corporation  shall  be  subject  to  a  penalty 
of  five  thousand  dollars,  which  penalty  shall  be  collected  on 
an  account  settled  by  the  Auditor  General  and  State  Treas- 
urer as  accounts  for  taxes  due  the  Commonwealth  are  set- 
tled and  collected,  and  the  Secretary  of  the  Commonwealth 
shall  cause  said  return  to  be  recorded  in  a  book  kept  for  that 
purpose  and  furnish  a  certified  copy  of  the  same  to  the 
Auditor  General.] 

LIMIT   OF   LIABILITIES. 

Section  24.  That  the  officers  and  stockholders  of  cor- 
porations organized  under  or  accepting  the  provisions  of  this 
act  shall  not  be  individually  liable  for  the  debts  of  said  cor- 
poration otherwise  than  in  this  provided. 

CONSTRUCTION  OF  GRANT  OF  POWER. 

Section  25.  The  incorporation  of  any  association  of 
persons  for  the  purposes  named  in  this  act,  or  accepting  the 
same,  shall  be  held  and  taken  to  be  of  the  same  force  and 
effect  as  if  the  powers  and  privileges  conferred,  and  the 
duties  enjoined,  had  been  conferred  and  enjoined  by  special 
act  of  the  legislature,  and  the  franchises  granted  shall  be 
construed  according  to  the  same  rules  of  law  and  equity  as 
if  it  had  been  created  by  special  charter,  and  no  modification 
or  repeal  of  this  act  shall  affect  any  franchise  obtained 
under  the  provisions  of  the  same. 


CORPORATIONS  55 

RETURN  TO  AUDITOR  GENERAL.^^ 

Section  26.  Hereafter  no  institution  or  company,  in- 
corporated or  organized  by  or  under  any  law  of  this  com- 
monwealth, general  or  special,  or  incorporated  or  organized 
under  the  laws  of  any  other  state  and  doing  business  in 
this  commonwealth  shall  go  into  operation  without  first  hav- 
ing the  name  of  the  institution  or  company,  the  date  of  in- 
corporation or  organization,  the  act  of  assembly  or  authority 
under  which  incorporated  or  organized,  the  place  of  busi- 
ness, the  post  office  address,  and  names  of  the  president, 
secretary  and  treasurer,  the  amount  of  capital  authorized  by 
its  charter,  and  the  amount  of  capital  paid  into  the  treasury 
of  the  company,  registered  in  the  office  of  the  auditor  gen- 
eral ;  and  every  institution  or  company  now  engaged  in 
business  in  this  commonwealth  shall,  within  ninety  days 
after  the  passage  of  this  act,  register  as  herein  required  in 
the  office  of  the  auditor  general;  and  any  such  institution  or 
company  which  shall  neglect  or  refuse  to  comply  with  the 
provisions  of  this  section,  shall  be  subject  to  a  penalty  of  five 
hundred  dollars,  which  penalty  shall  be  collected  on  an  ac- 
count settled  by  the  auditor  general  and  state  treasurer, 
in  the  same  manner  as  taxes  on  stock  are  settled  and  col- 
lected.'*^ 

CORPORATIONS    ACCEPTING. 

Any  corporation  or  corporations  for  any  of  the  pur- 
poses named  and  covered  by  the  provisions  of  this  act,  here- 
tofore created  by  any  special  act  or  acts,  or  in  existence  un- 
der the  provisions  of  any  general  law  of  this  commonwealth, 
shall  be  entitled  to  all  the  privileges,  immunities,  franchises 
and  powers  conferred  by  this  act  upon  corporations  to  be 
created  under  the  same,  upon  filing  in  the  office  of  the  sec- 

*^  In  the  Act  of  1874,  the  first  part  of  Section  26  dealt  with  this 
subject,  though  "confining  the  requirements  regarding  notice  to  the 
Auditor  General  to  corporations  of  the  second  class."'  This  part  of  the 
section  was  re-enacted  hy  the  Act  of  April  17,  1876.  Section  6,  P.  L. 
33.  But  the  Act  of  June  7,  1879,  Section  i,  printed  in  the  text,  seems 
to  completely  covers  the  subject. 

"A~t  of  June  7th,  1879,  Section  i,  P.  L.  112. 


56  PENNSYLVANIA  ASSOCIATION  ACTS 

retary  of  the  commonwealth  a  certificate  of  a  single  corpora- 
tion, or  a  joint  certificate  if  two  or  more  corporations  incor- 
porated for  and  doing  the  same  kind  of  business,  under  the 
seal  or  seals  of  said  corporation  or  corporations,  accepting 
the  provisions  of  the  constitution  and  of  this  act,  didy 
authorised  by  a  meeting  of  stockholders  called  for  that  pur- 
pose; and  upon  such  acceptance  and  approval  by  the  gover- 
nor, he  shall  issue  letters  patent  to  said  corporation,  or  if  two 
or  more  corporations,  to  said  corporations  as  one  corpora- 
tion, under  such  name  as  shall  be  designated  by  said  corpora- 
tion or  corporations  in  said  single  or  joint  certificate,  to- 
gether ivith  the  amount  and  capital,  number  of  shares  and 
par  value  thereof,  as  shall  be  designated  by  said  corporation 
or  corporations  in  said  certificate :  Provided,  That  zvhere 
two  or  more  corporations  shall  make  a  joint  certificate  as 
aforesaid,  and  letters  patent  shall  be  issued  to  said  new  cor- 
poration, said  corporations  shall  thenceforth  be  deemed,  held 
and  taken  to  be  merged  and  consolidated,  and  be  subject  to 
all  the  limitations  and  liabilities  of  this  act}'^ 

RE-CHARTERING    CORPORATIONS. 

Section  40.  Corporations  created  by  or  under  the 
laws  of  this  state,  embraced  within  either  of  the  classes 
named  in  section  two  of  this  act,  the  charters  whereof  are 
about  to  expire  by  lapse  of  time  from  their  own  limitation, 
may  be  re-chartered,  or  the  charters  thereof  renewed,  under 
the  provisions  of  this  act,  by  preparing,  having  approved 
and  recorded  the  certificate  named  in  said  section  for  the 
class  of  corporation  of  which  the  same  is  one,  in  addition 
to  the  requirements  provided  in  this  act  for  a  new  corpora- 
tion; the  certificate  for  a  re-charter  shall  state  the  fact  that 
it  is  a  renevi^al  of  the  former  charter,  naming  the  corpora- 


"  This  is  the  last  part  of  Section  26  of  the  Act  of  1874  as  it  was 
amended  by  Section  6  of  the  Act  of  April  17,  1876,  P.  L.  t,t,.  The  parts 
printed  in  italics  were  added  by  the  later  act. 

Sections  27  to  39  inclusive,  not  applying  to  all  corporations,  either 
of  the  first  or  second  class,  incorporated  under  the  Act  of  1874  or 
its  supplements,  are  omitted. 


CORPORATIOXS  57 

tion  and  the  date  of  its  first  charter.  It  shall  also  be  accom- 
panied with  a  certificate,  under  the  seal  of  the  corporation, 
showing  the  consent  of  at  least  a  majority  in  interest  of 
such  corporation  to  such  re-charter.  It  shall  also  state  the 
financial  condition  of  the  said  corporation  at  the  date  of 
such  certificate,  showing  capital  stock  paid  in,  funded  debt, 
floating  debt,  estimated  value  of  property  and  cash  assets, 
if  any.  It  shall  expressly  accept  the  provisions  of  the  con- 
stitution of  this  state  and  of  this  act,  and  expressly  surren- 
der all  privileges  conferred  upon  such  corporation  by  its 
original  charter  that  are  not  enjoyed  by  corporations  of  its 
class  under  this  act  or  general  laws  of  this  commonwealth. 
From  the  date  of  recording  of  such  certificate,  if  the  cor- 
poration be  of  the  first  class  named  in  section  two  of  this 
act,  and  from  the  date  of  letters  patent,  if  of  the  second 
class,  the  said  re-chartered  corporation  shall  be  and  exist 
as  a  new  corporation  under  the  provisions  of  this  act  and 
of  its  said  renewed  charter;  and  all  of  the  rights,  privileges, 
powers,  immunities,  lands,  property  and  assets,  of  whatever 
kind  or  character  the  same  may  be,  possessed  and  owned 
by  the  said  original  corporation,  shall  vest  in  and  be  owned 
and  enjoyed  by  the  said  re-chartered  corporation,  as  fully 
and  with  like  effect  as  if  its  original  charter  had  not  ex- 
pired, save  as  herein  and  by  said  certificate  expressly  stated 
otherwise ;  and  all  suits,  claims  and  demands  by  said  cor- 
porations in  existence  at  the  date  of  such  re-charter,  shall 
and  may  be  sued,  prosecuted  and  collected,  under  the  laws 
governing  the  said  corporation  prior  to  its  re-charter,  and 
all  claims  and  demands  of  ever}-  nature  and  character  in 
existence  at  said  re-charter,  may  be  collected  from  and  off 
the  said  re-chartered  corporation,  as  fully  and  with  like 
effect  as  if  no  change  had  taken  place. '^^ 


"  Section  41,   not  applying  to  all  corporations   incorporated   undf 
the  Act  of  1874  or  its  supplements,  is  omitted. 


58  PEXXSYLVAXIA  ASSOCIATIOX  ACTS 

AMENDMENTS    TO    CHARTERS CORPORATIONS    OF   THE    FIRST 

CLASS. 

Section  42.  As  often  as  the  corporations  named  in  the 
first  class,  specified  in  the  second  section  of  the  act  to  which 
this  is  a  supplement,  including  all  such  corporations  now  in 
existence,  and  academies,  colleges  and  universities,  shall  be 
desirous  of  improving,  amending  or  altering  the  articles  and 
conditions  of  their  charters,  it  shall  and  may  be  lawful  for 
such  corporations,  respectively,  in  like  manner  to  specify 
the  improvements,  amendments  or  alterations  which  are  or 
shall  be  desired,  and  exhibit  the  same  to  the  court  of  com- 
mon pleas  of  the  proper  county  in  which  said  corporation  is 
situated  as  aforesaid,  where  [when],  if  said  court  shall  be 
of  opinion  such  alterations  are  or  will  be  lawful  and  benefi- 
cial, and  do  not  conflict  with  the  requirements  of  the  stat- 
ute to  which  this  is  a  supplement  or  of  the  constitution,  it 
shall  be  the  duty  of  said  court  to  direct  notice  to  be  given, 
as  provided  in  the  third  section  of  the  act  to  which  this  is  a 
supplement,  of  such  application,  and  after  decree  made  and 
such  amendments  are  recorded,  the  same  shall  be  deemed 
and  taken  to  be  a  part  of  the  charter  of  the  said  corpora- 
tion; and  if  any  two  or  more  such  corporations  shall  desire 
to  consolidate  and  merge  zvith  each  other,  or  one  or  more 
within  the  other,  upon  application  to  the  court  of  common 
pleas  of  the  county  in  zvhich  the  corporation  is  situated,  into 
which  the  one  or  more  desire  to  merge  or  become  consoli- 
dated zvith  the  same,  proceedings  shall  take  place  as  are 
required  on  an  application  to  amend;  and  upon  decree  being 
made  by  said  court,  and  the  same  being  recorded  in  said 
county,  upon  the  terms  specified  in  said  application,  the  said 
corporations,  zvith  all  their  rights,  privileges,  franchises, 
pozvcrs  and  liabilities,  shall  merge  and  be  consolidated  into, 
bv  the  name,  style  and  title  given  to  the  same  in  such  decree, 
and  upon  the  terms,  limitations  and  zvith  the  pozvers  stated 
and  conferred  in  said  application  and  decree^^ 


"This  is  Section  42  of  the  Act  of  1874.  as  amended  by  the  Act 
of  April  17,  1876,  Section  12,  P.  L.  2:7-  The  parts  printed  in  italics 
were  added  by  the  amending  act. 


CORPORATIONS  59 

AMENDMENTS  TO  CHARTERS CORPORATIONS  OF  THE  SECOND 

CLASS.^^ 

[Section  i.  When  any  corporation,  formed  for  any  of 
the  purposes  named  in  the  second  class  of  section  two  of  the 
act  to  which  this  is  a  supplement,  or  embraced  in  that  class 
by  any  of  its  supplements,  and  which  shall  have  been  or  may 
hereafter  be  incorporated  under  the  provisions  of  that  act 
or  its  supplements,  as  also  any  corporation  of  the  second 
class  which  has  heretofore  or  may  hereafter  accept  the  pro- 
visions of  said  act  and  the  several  supplements  thereto,  and 
the  Constitution  of  this  Commonwealth  in  the  manner  pro- 
vided by  law,  shall  desire  to  improve,  amend  or  alter  the 
article  and  conditions  of  the  charter  or  instrument  upon 
which  said  corporation  is  formed  and  established,  it  shall 
and  may  be  lawful  for  such  corporation  to  apply  to  the 
Governor  of  this  Commonwealth  for  such  improvement, 
amendment  or  alteration  in  the  manner  provided  by  this 
act. 

[Section  2.  The  corporation  desiring  such  improve- 
ment, amendment  or  alteration  shall  give  notice  of  the  in- 
tention to  apply  therefor,  in  two  newspapers  of  general  cir- 
culation, printed  in  the  county  wherein  the  principal  office 
or  place  of  business  of  said  corporation  is  located,  once  a 
week  for  three  weeks,  setting  forth  briefly  the  character 
and  objects  of  the  desired  improvements,  amendments  or 
alterations,  and  the  intention  to  make  application  therefor. 

[Section  3.  The  said  corporation  shall  prepare  a  cer- 
tificate, under  its  corporate  seal,  setting  forth  the  character 
and  objects  of  the  proposed  improvement,  amendment  or 
alteration  of  their  charter,  or  the  instrument  upon  which 
the  said  corporation  is  formed  or  established ;  also,  that  all 
reports  required  by  the  Auditor  General  of  the  Common- 
wealth have  been  filed,  and  that  all  taxes  due  the  Common- 
wealth of  Pennsylvania  have  been  paid ;  acknowledged  by 


■'"'  The  Act  of  1874  did  not  deal  with  this  subject.  The  provision 
in  the  text  is  the  supplement  of  June  13,  1883,  P.  L.  122,  amended  as 
indicated  infra,  note  51. 


60  PENNSYLVANIA  ASSOCIATION  ACTS 

the  president  and  secretary  of  said  corporation  and  before 
the  recorder  of  deeds  of  the  county  wherein  such  corpora- 
tion has  its  principal  office  or  place  of  business;  which  cer- 
tificate, together  with  proof  of  publication  of  notice,  as 
provided  i)i  section  tzvo  of  the  siipplenicnt  to  an  act  of  zvhich 
this  is  an  amendment,  shall  then  be  produced  to  the  Gov- 
ernor of  the  Commonwealth,  who  shall  examine  the  same, 
and,  if  he  find  it  to  be  in  proper  form,  and  that  such  im- 
provements, amendments  or  alterations  are  or  will  be  law- 
ful and  beneficial,  and  not  injurious,  to  the  community,  and 
are  in  accord  with  the  purpose  of  the  charter,  and  that  all 
reports  required  by  the  Auditor  General  of  the  Common- 
n'calth  have  been  duly  filed,  and  that  all  taxes  due  the  Com- 
monzvealth  of  Pennsylvania  have  been  paid,  he  shall  approve 
thereof  and  endorse  his  approval  thereon,  and  direct  letters 
patent  to  issue,  in  the  usual  form,  reciting  the  said  improve- 
ments, amendments  or  alterations;  and  the  said  certificate 
shall  then  be  recorded  in  the  office  of  the  Secretary  of  the 
Commonwealth,  and,  with  all  its  endorsements,  shall  then 
be  recorded  in  the  office  for  the  recording  of  deeds  in  and 
for  the  proper  county,  where  the  principal  office  or  place  of 
business  of  said  corporation  is  located;  and  from  thence- 
forth the  same  shall  be  deemed  and  taken  to  be  a  part  of 
the  charter  or  instrument  upon  which  said  corporation  was 
formed  or  established,  to  all  intents  and  purposes,  as  if  the 
same  had  originally  been  made  a  part  thereof :  Provided, 
That  nothing  herein  contained  shall  authorize  the  amend- 
ment, alteration,  improvement  or  extension  of  the  charter 
of  any  gas  or  water  company,  so  as  to  interfere  with  or 
cover  territory  previously  occupied  by  any  other  gas  or 
water  company.^  ^ 

[Section  4.  Nothing  in  this  act  contained  shall  be  con- 
strued to  repeal  or  authorize  the  repeal  of  any  of  the 
requirements  or  restrictions  of  the  said  act  of  April  twenty- 


•"  This  is  Section  3  of  the  Act  of  June  13,  1883,  P.  L.  123,  as  amended 
by  the  Act  of  the  31st  of  March,  1905,  P.  L.  93.  The  words  printed 
in  italics  are  those  added  by  the  amending  act. 


CORPORATIONS  61 

ninth,  one  thousand  eight  hundred  and  seventy-four  and 
its  supplements,  nor  to  dispense  with  any  of  the  provisions 
of  the  said  act,  nor  to  authorize  the  right  of  eminent  domain 
to  be  given  to  any  corporation  by  amendment  of  its  charter, 
nor  to  permit  any  change  in  the  objects  and  purposes  of 
such  corporation  as  shown  by  its  original  charter. ]'^- 

BONUS.^^ 

[Section  i.  All  corporations  hereafter  created  under 
any  general  or  special  law  of  this  Commonwealth,  except 
building  and  loan  associations,  and  excepting  all  corporations 
named  in  the  first  class  of  section  two  of  an  act,  entitled  "An 
act  to  provide  for  the  incorporation  and  regulation  of  certain 
corporations,"  approved  the  twenty-ninth  day  of  April,  Anno 
Domini  one  thousand  eight  hundred  and  seventy-four,  shall 
pay  to  the  State  Treasurer,  for  the  use  of  the  Common- 
wealth, a  bonus  of  one-third  of  one  per  centum  upon  the 
amount  of  the  capital  stock  which  said  company  is  author- 
ized to  have,  and  a  like  bonus  on  any  subsequent  author- 
ized increase  thereof,  and  a  like  bonus  shall  be  paid  by  all 
such  companies  heretofore  incorporated  upon  any  increase 
of  their  capital  stock  hereafter  authorized.  And  no  com- 
pany as  aforesaid  shall  have  or  exercise  any  corporate  pow- 
ers until  the  said  bonus  is  paid,  and  the  Governor  shall  not 
issue  letters  patent  to  any  company  until  he  is  satisfied  that 
the  said  bonus  has  been  paid  to  the  State  Treasurer.  And 
no  company  incorporated  as  aforesaid  shall  go  into  opera- 
tion, or  exercise  any  corporate  powers  or  privileges,  until 
said  bonus  has  been  paid.  The  Secretary  of  the  Common- 
wealth shall  not  permit  the  filing  in  his  office  of  any  pro- 
ceedings  for  increase  of  capital  stock  until  he  is  satisfied 

"  Section  50  of  the  Act  of  1874,  not  relating  to  all  corporations 
either  of  the  first  or  second  class,  is  omitted. 

•■^This  was  the  subject  of  Section  44  of  the  Act  of  1874.  The  sec- 
tion was  amended  by  the  Act  of  May  22,  1878.  P.  L.  97,  and  again 
amended  by  the  Act  of  June  15,  1897,  P.  L.  155.  In  the  second  amend- 
ing act  the  section  was  stated  for  the  purpose  of  amendment  as  it  stood 
in  1874,  the  amendment  of  1878  being  ignored.  The  addition  to  the 
law   by   the    amendment    of    1878    failed,    therefore,    to    be    re-enacted. 


62  PENNSYLVANIA  ASSOCIATION  ACTS 

that  the  said  bonus  upon  said  authorized  increase  has  been 
paid  to  the  State  Treasurer.  J'^^ 

Section  45.  It  shall  be  the  duty  of  the  Secretary  of  the 
Commonwealth,  every  tzvo  years,  to  prepare  and  publish,  in 
separate  pamphlet  form,  a  certified  list  of  all  charters  of  in- 
corporations filed  in  his  office,  and  incorporated  under  the 
provisions  of  this  act,  stating  the  style,  title,  purpose  and 
location  of  every  such  corporation,  and  he  shall  prepare  and 
publish  a  complete  alphabetical  index  to  the  same.^"^ 


The  Act  of  May  3,  1899,  Section  l,  P.  L.  189,  which  is  printed  in  the 
text,  though  it  does  not  purport  to  be  an  amendment  or  supplement 
to  the  Act  of  1874,  covers  the  entire  subject,  and  has  apparently  supplied 
Section  44  of  the  Act  of  1874  and  its  amendments. 

"  Act  of  May  3,  1899,  Section  i,  P.  L.  189.  The  Act  of  April  18, 
1874,  Section  7,  P.  L.  62,  provides :  "That  every  company,  except  rail- 
road, canal,  turnpike,  bridge  or  cemetery  companies,  and  companies 
incorporated  for  literary,  charitable  or  religious  purposes,  which  shal!  in- 
crease its  capital  stock  under  the  provisions  of  this  act  shall  pay  to  the 
state  treasurer,  for  the  use  of  the  commonwealth,  a  bonus  of  one-quarter 
of  one'per  centum  upon  the  amount  of  said  increase,  in  two  instalments, 
the  first  to  be  due  upon  the  filing  of  the  certificate  required  by  the 
preceding  section  of  this  act,  to  be  filed  in  the  office  of  the  secretary  of 
the  commonwealth,  and  the  second  instalment  one  year  thereafter: 
Provided,  That  nothing  in  this  act  shall  be  construed  to  reduce  the 
amount  of  bonus  to  be  paid  by  any  company  having  in  its  charter  a 
special  provision  requiring  the  payment  of  a  bonus  at  a  higher  rate 
than  one-quarter  of  one  per  centum." 

^'The  parts  printed  in  italics  were  added  by  the  Act  of  June  7,  1901, 
P.  L.  530.  The  Act  of  1901  also  provides  for  the  distribution  of  the 
publication. 

The  Act  of  June  13,  1883,  Section  7,  P.  L.  122.  provides  that  the 
Act  of  1874  "shall  hereafter  be  cited  and  known  as  the  Corporation  Act 
of  1874." 


CORPORATIONS  63 

LAWS  RELATING  TO  ALL  CORPORATIOXS, 
EITHER  OF  THE  FIRST  OR  SECOND  CLASS 
OR  BOTH.  DEALING  WITH  SUBJECTS  FOR 
W^HICH  NO  PROVISION  WAS  MADE  IN  THE 
ACT  OF  1874.^ 

ORGANIZATION. 

Any  corporation  of  the  second  class,  created  under  the 
provisions  of  the  act  to  which  this  is  a  supplement,  or  any 
of  its  supplements,  that  shall  not  within  two  years  from  the 
date  of  its  letters  patent  proceed  in  good  faith  to  organize 
and  to  do  the  things  contemplated  by  its  charter,  and  have 
paid  up  at  least  one-fourth  of  its  capital  stock,  shall  be  held 
and  deemed  to  have  forfeited  its  charter,  and  the  Attornev 
General  shall,  on  the  application  of  any  citizen,  take  the 
proper  legal  steps  to  forfeit  and  vacate  its  said  charter,  but 
any  corporation  now  in  existence  shall  have  two  years  from 
the  date  of  this  act  to  do  and  perform  the  things  by  this 
section  required.- 

CHANGE  OF  PAR  VALUE  OF  SHARES.^ 

Section  i.  It  shall  be  lawful  for  any  corporation, 
organized  under  the  laws  of  this  State,  to  change  the  par 
value  or  face  value  of  the  shares  into  which  its  capital  stock 
is  divided.  Such  change  shall  be  authorized  by  a  vote  of  a 
majority  of  the  stockholders  of  any  such  company,  present 
in  person  or  by  proxy  at  any  annual  meeting,  or  any  special 
meeting  duly  called  for  that  purpose.  Such  change  of  the 
par  value  of  the  capital  stock  shall  not  be  taken  to  increase 
or  diminish,  or  change  in  any  way,  the  total  aggregate  par 
value  of  the  capital  stock  which  said  company  may  be  au- 
thorized to  issue  or  may  have  issued,  but  only  to  change  the 
number  of  shares  into  which  the  same  mav  be  divided. 


*  Omits  laws  relating  to  suits  against  corporations,  execution  and 
taxation. 

*Act  of  June  13.  1883.  Section  5,  P.  L.  123. 

^  Act  of  July  2,  1901,  P.  L.  606. 


64  PENNSYLVANIA  ASSOCIATION  ACTS 

Section  2.  In  case  the  stockholders,  so  present  at  such 
meeting,  shall  vote  to  increase  or  diminish  the  par  value  of 
the  shares  of  the  capital  stock  of  the  company,  as  above 
provided,  it  shall  be  the  duty  of  the  proper  officers  of  the 
company  to  file  a  certificate  of  the  fact  in  the  office  of  the 
Secretary  of  the  Commonwealth,  under  the  seal  of  the  cor- 
poration; and  thereupon  the  proper  officers  of  such  corpora- 
tion shall  issue  to  the  stockholders  the  proper  number  of 
shares  of  the  capital  stock  of  the  new  par  value,  in  ex- 
change for  outstanding  shares  of  the  former  par  value,  upon 
the  surrender  of  such  outstanding  shares  by  the  respective 
holders  and  the  cancellation  thereof. 

MERGER  AND  CONSOLIDATION.^ 

Section  i.  It  shall  be  lawful  for  any  corporation  now 
or  hereafter  organized  under,  or  accepting  the  provisions  of, 
the  act,  entitled  "An  act  to  provide  for  the  incorporation 
and  regulation  of  certain  corporations,"  approved  April 
twenty-ninth,  one  thousand  eight  hundred  and  seventy-four, 
or  of  any  of  the  supplements  thereto,  or  of  any  other  act 
of  Assembly  authorizing  the  formation  of  corporations,  to 
buy  and  own  the  capital  stock  of,  and  to  merge  its  corporate 
rights,  powers  and  privileges  with  and  into  those  of,  any 
other  corporation,  so  that  by  virtue  of  this  act  such  cor- 
porations may  consolidate,  and  so  that  all  the  property, 
rights,  franchises  and  privileges  then  by  law  vested  in  either 
of  such  corporations,  so  merged,  shall  be  transferred  to  and 
vested  in  the  corporation  into  which  such  merger  shall  be 
made :  Provided,  That  nothing  in  this  act  shall  be  construed 
so  as  to  permit  railroad,  canal,  telegraph  companies,  which 
own,  operate  or  in  any  way  control  parallel  or  competing 
roads,  canals  or  lines,  to  merge  or  combine :  And  provided 
further.  That  any  corporation  formed  for  the  purpose  of 
carrying  on  any  manufacturing  business  under  the  seven- 
teenth or  eisfhteenth  clause  of  section  two  of  an  act  entitled 


*Act  of  ^lay  29,  1901,  P.  L.  349. 


CORPORATIONS  65 

"An  act  to  provide  for  the  incorporation  and  regulation  of 
certain  corporations,**  approved  April  twenty-ninth,  one 
thousand  eight  hundred  and  seventy-four,  with  the  powers 
conferred  by  section  thirty-eight  or  section  thirty-nine  of 
said  act,  may  be  merged  and  consolidated,  under  the  pro- 
visions of  this  act,  with  any  other  corporation  formed  for 
any  purpose  provided  for  in  either  the  seventeenth  or  eigh- 
teenth clause  of  section  two  of  the  act  above  cited;  but  noth- 
ing in  this  act  contained  shall  extend  or  enlarge  beyond  its 
former  territorial  limits  the  exclusive  franchise  of  any  gas 
or  water  company. 

•  Section  2.  Said  merger  or  consolidation  shall  be  made 
under  the  conditions,  provisions  and  restrictions,  and  with 
the  powers  herein  set  forth,  to  wit : 

I.  The  directors  of  each  corporation  may  enter  into 
a  joint  agreement,  under  the  corporate  seal  of  each  corpora- 
tion, for  the  merger  and  consolidation  of  said  corporations ; 
prescribing  the  terms  and  conditions  thereof,  the  mode  of 
carrying  the  same  into  effect,  the  name  of  the  new  corpora- 
tion, the  number  and  names  of  the  directors  and  other 
officers  thereof,  and  who  shall  be  the  first  directors  and  offi- 
cers and  their  places  of  residence,  the  number  of  shares  of 
the  capital  stock,  the  amount  or  par  value  of  each  share,  and 
the  manner  of  converting  the  capital  stock  of  each  of  said 
corporations  into  the  stock  of  the  new  corporation,  and  how 
and  when  directors  and  officers  shall  be  chosen,  with  such 
other  details  as  they  shall  deem  necessary  to  perfect  the 
said  consolidation  and  merger ;  but  said  agreement  shall  not 
be  effective  unless  the  same  shall  be  approved  by  the  stock- 
holders of  said  corporations,  in  the  manner  hereinafter  pro- 
vided. 

II.  Said  agreement  shall  be  submitted  to  the  stockholders 
of  each  of  said  corporations,  at  separate  special  meetings,  of 
the  time,  place  and  object  of  which  respective  meetings  due 
notice  shall  be  given  by  publication,  once  a  week  for  two 
successive  weeks  before  said  respective  meetings,  in  at  least 
one  newspaper  in  the  county  or  each  of  the  counties  in  which 


66  PENNSYLVANIA  ASSOCIATION  ACTS 

the  principal  offices  of  said  respective  corporations  shall  be 
situate;  and  at  said  meetings  the  said  agreement  of  the 
directors  shall  be  considered,  and  a  vote  of  the  stockholders 
in  person  or  by  proxy  shall  be  taken,  by  ballot,  for  the  adop- 
tion or  rejection  of  the  same,  each  share  of  stock  entitling  the 
holder  thereof  to  one  vote,  and  if  a  majority  in  amount  of 
the  entire  capital  stock  of  each  of  said  corporations  shall 
vote  in  favor  of  said  agreement,  merger  and  consolidation, 
then  that  fact  shall  be  certified  by  the  secretary  of  each  cor- 
poration, under  the  seal  thereof,  and  said  certificates,  to- 
gether w^ith  the  said  agreement  or  a  copy  thereof,  shall  be 
filed  in  the  office  of  the  Secretary  of  the  Commonwealth, 
whereupon  the  said  agreement  shall  be  deemed  and  taken 
to  be  the  act  of  consolidation  of  said  corporations. 

Section  3.  Upon  the  filing  of  said  certificates  and 
agreement,  or  copy  of  agreement,  in  the  office  of  the  Sec- 
retary of  the  Commonwealth,  the  said  merger  shall  be 
deemed  to  have  taken  place  and  the  said  corporations  to  be 
one  corporation  under  the  name  adopted  in  and  by  said 
agreement,  possessing  all  the  rights,  privileges  and  fran- 
chises theretofore  vested  in  each  of  them,  and  all  the  estate 
and  property,  real  and  personal,  and  all  the  rights  of  action 
of  each  of  said  corporations,  shall  be  deemed  and  taken  to 
be  transferred  to  and  vested  in  the  said  new  corporation, 
without  any  further  act  or  deed :  Provided,  That  all  rights 
of  creditors  and  all  liens  upon  the  property  of  each  of  said 
corporations  shall  continue  unimpaired,  and  the  respective 
constituent  corporations  may  be  deemed  to  be  in  existence  to 
preserve  the  same;  and  all  debts,  duties  and  liabilities  of  each 
of  said  constituent  corporations  shall  thenceforth  attach  to 
the  said  new  corporation,  and  may  be  enforced  against  it 
to  the  same  extent  and  by  the  same  process  as  if  said  debts, 
duties  and  liabilities  had  been  contracted  by  it.  But  such 
merger  and  consolidation  shall  not  be  complete,  and  no 
such  consolidated  corporation  shall  do  any  business  of  any 
kind,  until  it  shall  have  first  obtained  from  the  Governor  of 
the  Commonwealth  new  Letters  Patent,  and  shall  have  paid 


CORPORATIONS  67 

to  the  State  Treasurer  a  bonus  of  one-third  of  one  per 
centum  on  all  its  corporate  stock  in  excess  of  the  amount 
of  the  capital  stock  of  the  several  corporations  so  consoli- 
dating, upon  which  the  bonus  required  by  law  had  been 
theretofore  paid:  Ajtd  provided  further,  That  new  letters 
patent  of  such  consolidated  corporation  shall  not  be  issued 
by  the  Governor  of  the  Commonwealth  until  each  and  every 
corporation,  entering  and  forming  the  consolidated  corpora- 
tion, shall  have  filed  with  the  Secretary  of  the  Common- 
wealth a  certificate  from  the  Auditor  General  of  the  Com- 
monwealth, setting  forth  that  all  reports  required  by  the 
Auditor  General  of  the  Commonwealth  have  been  duly  filed, 
and  that  all  taxes  due  the  Commomvealth  of  Pennsylvania 
have  been  paid.^ 

Section  4.  A  certified  copy  of  said  certificate  and 
agreement,  or  copy  of  agreement,  so  to  be  filed  in  the 
office  of  the  Secretary  of  the  Commonwealth,  shall  be  evi- 
dence of  the  lawful  holding  and  action  of  such  meetings,  and 
of  the  merger  and  consolidation  of  said  corporations. 

Section  5.  If  any  stockholder  or  stockholders  of  any 
corporation  which  shall  become  a  party  to  an  agreement  of 
merger  and  consolidation  hereunder,  shall  be  dissatisfied 
with  or  object  to  such  consolidation,  and  shall  have  voted 
against  the  same  at  the  stockholders'  meeting,  it  shall  and 
may  be  lawful  for  any  such  stockholder  or  stockholders, 
within  thirty  days  after  the  adoption  of  said  agreement  of 
merger  and  consolidation  by  the  stockholders  as  herein  pro- 
vided, and  upon  reasonable  notice  to  said  corporation,  to 
apply  by  petition  to  any  court  of  common  pleas  of  the 
county  in  which  the  chief  office  of  such  corporation  may  be 
situate,  or  to  a  judge  of  said  court  in  vacation,  if  no  such 
court  sits  during  said  period,  to  appoint  three  disinterested 
persons  to  estimate  and  appraise  the  damages,  if  any,  done 
to  such  stockholder  or  stockholders  by  said  consolidation. 
Upon  such  petition,  it  shall  be  the  duty  of  said  court,  or 

^The  words  in  italics  were  added  bv  the  Act  of  March  31,   1905, 
P.  L.  95. 


68  PENNSYLVANIA  ASSOCIATION  ACTS 

judge,  to  make  such  appointment;  and  the  award  of  the 
persons  so  appointed,  or  of  a  majority  of  them,  when  con- 
firmed by  the  said  court,  shah  be  final  and  conclusive ;  and 
the  persons  so  appointed  shall  also  appraise  the  share  or 
shares  of  said  stockholders  in  the  said  corporation,  at  the 
full  market  value  thereof,  without  regard  to  any  apprecia- 
tion or  depreciation  in  consequence  of  the  said  consolidation, 
which  appraisement,  when  confirmed  by  the  said  court,  shall 
be  final  and  conclusive;  and  the  said  corporation  may,  at  its 
election,  either  pay  to  the  said  stockholder  or  stockholders 
the  amount  of  damages  so  found  and  awarded,  if  any,  or  the 
value  of  the  stock  so  ascertained;  and  upon  the  payment  of 
the  value  of  the  stock  as  aforesaid,  the  said  stockholder  or 
stockholders  shall  transfer  the  stock  so  held  by  them  to  the 
said  corporation,  to  be  disposed  of  by  the  directors  thereof 
or  to  be  retained  for  the  benefit  of  the  other  stockholders; 
and  in  case  the  value  of  said  stock,  as  aforesaid,  shall  not  be 
so  paid  within  thirty  days  after  the  said  award  shall  have 
been  confirmed  by  said  court,  the  damages  so  found  and 
confirmed  shall  be  a  judgment  against  said  corporation,  and. 
may  be  collected  as  other  judgments  in  said  court  are  by 
law  recoverable. 

CHANGE  OF   NAME. 

It  shall  be  lawful  for  the  several  courts  of  common 
pleas  of  this  Commonwealth  to  change  the  name,  style  and 
title  of  any  corporation  of  the  class  named  in  the  first  sec- 
tion of  this  act  [corporations  not  for  profit]  within  their 
respective  counties,  with  the  same  proceedings  and  in  the 
same  manner  as  they  are  now  authorized  to  improve,  amend 
or  alter  the  charters  of  such  corporations.^ 

It  shall  be  lawful  for  any  corporation  of  this  Com- 
monwealth, heretofore  or  hereafter  created  by  any  gen- 
eral or  special  law,  to  change  its  corporate  title  by  resolu- 
tion of  its  Board  of  Directors,  adopted  by  a  two-thirds  vote 


'Act  of  May  2.  1899,  Section  2,  P.  L.  160.    The  first  section  of  the 
act  validates  certain  changes  of  names  heretofore  made. 


CORPORx\TIONS  69 

thereof,  approved  at  any  annual  meeting,  or  special  meeting 
duly  called,  of  the  stockholders  by  a  two-thirds  vote  thereof. 
Upon  such  approval  by  the  stockholders,  it  shall  be  the  duty 
of  the  President  of  said  corporation  to  file  in  the  office  of 
the  Secretary  of  the  Commonwealth  a  certificate,  under  the 
seal  of  the  company,  setting  forth  the  resolution  adopted  by 
the  Board  of  Directors  and  approved  by  the  stockholders, 
the  date  of  the  adoption  of  such  resolution  by  the  Board  of 
Directors  and  the  date  of  its  approval  by  the  stockholders, 
the  date  of  the  original  incorporation  of  the  company,  the 
act  of  Assembly  under  which  the  said  corporation  wa-5 
created,  the  name  under  which  the  said  corporation  was 
originally  incorporated  and  all  subsequent  changes  therein, 
and  the  name  which  the  corporation  desires. to  adopt.  The 
Secretary  of  the  Commonwealth  shall  examine  the  records 
in  his  office,  and,  if  he  find  that  the  name  desired  by  said  cor- 
poration does  not  conflict  with  the  name  of  any  corporation 
appearing  upon  said  records,  he  shall  require  the  said  certificate 
to  be  recorded,  and  shall  issue  to  the  said  corporation  a  cer- 
tificate, under  his  hand  and  the  seal  of  his  office,  granting 
to  said  corporation  the  use  of  said  new  corporate  title.  The 
Secretary  of  the  Commonwealth  shall,  upon  the  issuing  of 
any  such  certificate,  require  the  same  to  be  recorded  in  a  book 
kept  for  that  purpose,  and  certify  the  said  change  in  the 
corporate  title  to  the  Auditor  General  of  this  Common- 
wealth :  Provided,  That  any  corporation,  required  to  record 
the  original  certificate  of  incorporation  in  the  office  for  the 
recording  of  deeds,  shall,  before  being  entitled  to  use  the  new 
corporate  title,  record  in  the  office  for  the  recording  of 
deeds,  where  the  original  certificate  of  incorporation  was 
recorded,  the  said  certificate  granted  by  the  Secretary  of  the 
Commonwealth  authorizing  the  use  of  the  new  corporate 
title :  Provided  also.  That  this  act  shall  not  apply  to  corpora- 
tions not  for  profit.''' 


^  Act  of  April  22,  1903.  Section  t,  P.  L.  251. 


70  PENNSYLVANIA  ASSOCIATION  ACTS 

CERTAIN  RIGHTS  AND  DUTIES, 
(a)  Obligations  to  be  redeemable  in  gold  and  silver. 

It  shall  not  be  lawful  for  any  corporation  within  this 
commonw^ealth,  directly  or  indirectly,  either  by  itself  or 
through  any  agent  or  agents,  individual  or  individuals,  to  make, 
issue,  re-issue,  pay  out  or  circulate,  or  cause  to  be  issued,  re- 
issued, put  out  or  circulated,  any  certificate,  check,  order  or 
due  bill,  or  acknowledgment  of  indebtedness  of  any  descrip- 
tion for  any  purpose  whatsoever,  payable  or  redeemable  in 
any  goods,  property  or  effects,  or  payable  or  redeemable  in 
anything  except  in  gold  and  silver,  and  that  any  violation 
of  the  provisions  of  this  act  shall  be  held  and  deemed  to  be 
a  forfeiture  of  the  charter  of  any  company  so  offending, 
and  any  private  citizen  may  by  quo  warranto  proceed,  accord- 
ing to  law,  to  have  such  forfeiture  declared :  Provided,  That 
this  act  shall  not  be  construed  to  authorize  any  corporation 
or  individual,  not  expressly  authorized  by  existing  laws,  to 
issue  any  note,  bill,  check  or  certificate  whatever,  in  the 
nature  or  similitude  of  a  bank  note,  and  intended  for  circu- 
lation; and  that  all  laws  inconsistent  with  this  act,  be  and 
the  same  are  hereby  repealed:  And  provided  further,  That 
this  section  shall  not  be  construed  so  as  to  prevent  any  cor- 
poration from  drawing  orders  in  the  ordinary  course  of 
business,  not  intended  for  circulation,  or  in  payment  of  in- 
terest, and  that  such  orders  shall  not  be  negotiable.^ 

(b)  Corporations  for  profit  may  pension  employees. 
Corporations  organized  for  profit  may,  out  of  the  earn- 
ings of  said  corporations,  grant  allowances  or  pensions  to 
employes  for  faithful  and  long  continued  service,  who  have, 
in  such  service,  become  old,  infirm  or  disabled :  Provided, 
That  the  provisions  of  this  act  shall  not  apply  to  any  director 
or  officer  of  any  such  company  or  corporation.^ 


'Act  of  April  21.  1849,  Section  i,  P.  L.  6y2,. 
*Act  of  May  11,  1893,  Section  i,  P.  L.  42. 


CORPORATIONS  71 

(c)  Paj'ments  of  dividends  due  the  Commonwealth. 
In  all  incorporated  companies  (banking  companies  ex- 
cepted) now  created,  or  which  may  hereafter  be  created  b}' 
virtue  of  any  law  of  this  commonwealth,  and  in  which  any 
portion  of  the  stock  now  is  or  hereafter  shall  be  held  by  the 
state,  and  whereon  dividends  have  been  or  hereafter  may  be 
declared  by  the  directors  or  managers  thereof,  respectively, 
it  shall  be  the  duty  of  each  and  every  of  the  treasurers  of 
the  said  incorporations  respectively,  to  pay  the  proportions 
due  to  the  state  into  the  treasury  of  this  commonwealth, 
within  sixty  days  after  each  declaration  of  dividends,  and 
within  sixty  days  after  passage  of  this  act  with  respect  to 
dividends  heretofore  declared,  and  on  failure  to  make  such 
payment,  the  governor  is  hereb}^  directed  to  instruct  the 
attorney  general  to  bring  suit  therefor  against  such  default- 
ing company.  ^° 

(d)  Power  to  purchase  stock  and  securities  of  other  companies. 
Any  corporation  organized  for  profit,  created  by  gen- 
eral or  special  laws,  may  purchase,  hold,  sell,  assign,  trans- 
fer, mortgage,  pledge,  or  otherw.ise  dispose  of,  the  shares 
of  the  capital  stock  of,  or  any  bonds,  securities  or  evidences 
of  indebtedness  created  by,  any  other  corporation  or  cor- 
porations of  this  or  any  other  State,  and  while  the  owner  of 
said  stock  may  exercise  all  the  rights,  powers  and  privileges 
of  ownership,  including  the  right  to  vote  thereon.  ^^ 

DISSOLUTION, 
(a)   Voluntary. 

It  shall  be  lawful  for  any  court  of  common  pleas  of  the 
proper  county  to  hear  the  petition  of  any  corporation  under 


"Act  of  March  19,  1816,  6  Sm.  L.  390. 

"  Act  of  July  2,  1901,  P.  L.  603.  The  Act  of  March  31,  1868,  Section 
I,  P.  L.  50,  permits  the  investment  of  the  surplus  funds  of  a  corpora- 
tion "in  mortgages  on  improved  real  estate,  in  ground  rents,  in  the 
loans  of  the  United  States,  in  purchase  from  the  holders  thereof  any 
of  the  shares  of  the  capital  stock  of  the  respective  company,  and  also 
in  the  puhlic  dclit  of  the  State  of  Pennsylvania,  or  of  the  City  of  Phil- 
adelphia, or  in  other  good  stocks  and  securities." 


72  PENNSYLVANIA  ASSOCIATION  ACTS 

the  seal  thereof,  by  and  with  the  consent  of  a  majority  of 
a  meeting  of  the  corporators,  duly  convened,  praying  for 
permission  to  surrender  any  power  contained  in  its  charter, 
or  for  the  dissolution  of  such  corporation;  and  if  such  court 
shall  be  satisfied  that  the  prayer  of  such  petition  may  be 
granted  without  prejudice  to  the  public  welfare,  or  the  inter- 
ests of  the  corporators,  the  court  may  enter  a  decree  in  ac- 
cordance with  the  prayer  of  the  petition,  whereupon  such 
power  shall  cease  or  such  corporation  be  dissolved :  Pro- 
vided, That  the  surrender  of  any  such  power  shall  not  in 
anywise  remove  any  limitation  or  restriction  in  such  charter ; 
and  that  the  accounts  of  the  managers,  directors,  or  trustees 
of  any  dissolved  company  shall  be  settled  in  such  court, 
and  be  approved  thereby ;  and  dividends  of  the  effects  shall 
be  made  among  any  corporators  entitled  thereto,  as  in  the 
case  of  the  accounts  of  assignees  and  trustees :  Provided 
further,  That  no  property  devoted  to  religious,  literary  or 
charitable  uses  shall  be  diverted  from  the  objects  for  which 
they  were  given  or  granted :  Provided,  That  the  decree  of 
said  court  shall  not  go  into  effect  until  a  certified  copy 
thereof  be  filed  and  recorded  in  the  office  of  the  secretary 
of  the  commonwealth. ^- 

(b)  Involuntary. 

Writs  of  quo  warranto  in  the  form  and  manner  herein- 
after provided,  may  also  be  issued  by  the  several  courts  of 
common  pleas,  concurrently  with  the  supreme  court,  in  the 
following  cases,  to  wit : 

IV.  In  case  any  association,  or  number  of  persons, 
shall  act  as  a  corporation,  or  shall  exercise  any  of  the  fran- 
chises or  privileges  of  a  corporation,  within  the  respective 
county,  without  lawful  authority. 

V.  In  case  any  corporation  as  aforesaid,  shall  forfeit  by 


*^Act  of  April  9.  1856,  P.  L.  293.  The  Supplemental  Act  of  April 
4,  1872,  P.  L.  40,  provides  that  the  "proper  county"  in  which  to  make 
the  application  may  be  either  the  county  in  which  the  corporation's 
principal  operations  are  carried  on,  or  the  county  in  which  its  principal 
office  is  located,  but  publication  must  be  made  in  both  counties. 


CORPORATIONS  73 

misuser,  or  non-user,  its  corporate  rights,  privileges  or  fran- 
chises, or  shall  do,  suffer,  or  omit  to  do,  any  act,  matter  or 
thing,  whereby  a  forfeiture  thereof  shall  by  law  be  created, 
or  shall  exercise  any  power,  privilege  or  franchise  not 
granted  or  appertaining  to  such  corporation. 

And  in  any  such  case,  the  writ  aforesaid  may  be  issued 
upon  the  suggestion  of  the  Attorney  General,  or  his  deputy, 
in  the  respective  county,  or  of  any  person  or  persons  desir- 
ing to  prosecute  the  same.^^ 

Whenever  any  corporation,  incorporated  under  the 
laws  of  this  commonwealth,  shall  have  been  dissolved  by 
judgment  of  ouster,  upon  proceedings  of  quo  zvarraiito  in 
any  court  of  competent  jurisdiction,  all  the  estate,  both  real 
and  personal,  of  which  such  corporation  are  in  any  wav 
seized  or  possessed,  shall  pass  to  and  vest  in  the  persons  who 
at  the  time  of  such  dissolution  are  the  officers  of  such  corpor- 
ation, in  trust  to  hold  the  same  for  the  benefit  of  the  stock- 
holders and  creditors  of  the  corporation.^'* 

Whenever  any  corporation  incorporated  under  the  laws 
of  this  Commonwealth  shall  be  dissolved  by  judgment  of 
ouster  upon  proceedings  by  quo  warranto  in  any  court  of 
competent  jurisdiction,  the  said  court,  or  in  vacation  any 
one  of  the  law  judges  thereof,  shall  have  power  to  appoint 
a  receiver,  who  shall  have  all  the  powers  of  a  receiver  ap- 
pointed by  a  court  of  chancery,  to  take  possession  of  all  the 
estate,  both  real  and  personal  thereof,  and  make  distribution 
of  the  assets  among  the  persons  entitled  to  receive  the  same 
according  to  law.  The  powers  of  such  receiver  may  con-  . 
tinue  as  long  as  the  court  deems  necessary  for  said  purposes 
and  he  shall  be  held  to  supersede  an  assignee  of  the  corpora- 
tion in  possession. ^^ 


'■''  Act  of  June  14,  1836,  Section  2,  P.  L.  623. 

"Act  of  April  4,  1872,  Section  i,  P.  L.  46. 

"  Act  of  April  26,  1893,  Section  i,  P.  L.  26.  Tt  takes  the  place  of 
Section  2  of  the  Act  of  April  4,  1872,  P.  L.  46,  in  which  the  right  to 
appoint  a  receiver  was  confined  to  a  member  of  the  Supreme  Court. 

The  Act  of  April  15.  1891.  P.  L.  15,  provides  for  the  sale  of  the 
real  estate  of  a  dissolved  corporation,  and  the  distribution  of  the  pro- 
ceeds of  the  sale. 


74  PENNSYLVANIA  ASSOCIATION  ACTS 

SALE  OF  CORPORATE   FRANCHISES  AND  PROPERTY. 

Whenever  the  material,  rolling  stock,  property  and 
franchises  of  any  gas,  zuater,  coal,  iron,  steel,  lumber,  oil, 
or  mining  or  manufacturing,  transportation  or  telegraph 
company,  or  any  railroad,  canal,  turnpike,  bridge  or  plank 
road,  or  of  any  corporation,  created  by  or  under  any  law  of 
this  State,  shall  be  sold  and  conveyed,  under  and  by  virtue 
of  any  process  or  decree  of  any  court  of  this  State  or  of 
the  circuit  court  of  the  United  States,  [or  under  or  by  vir- 
tue of  a  power  of  sale  contained  in  any  mortgage  or  deed 
of  trust,  without  any  process  or  decree  of  a  court  in  the 
premises,]  the  person  or  persons  for  or  on  whose  account 
such  material,  rolling  stock,  property  and  franchises  of  any 
gas,  water,  coal,  iron,  steel,  lumber,  oil,  or  mining  or  manu- 
facturing, transportation  or  telegraph  company,  or  any  rail- 
road, canal,  turnpike,  bridge  or  plank  road,  or  of  any  cor- 
poration, created  by  or  wider  any  lazv  of  this  State,  may  be 
purchased,  shall  be  and  they  are  hereby  constituted  a  body 
politic  arid  corporate,  and  shall  be  vested  with  all  the  right, 
title,  interest,  property,  possession,  claim  and  demand  in  law 
and  equity,  of,  in  and  to  such  material,  rolling  stock,  prop- 
erty or  franchises  of  any  gas,  water,  coal,  iron,  steel,  litmber, 
oil,  or  mining  or  manufacturing,  transportation  or  telegraph 
company,  or  any  railroad,  canal,  turnpike,  bridge  or  plank 
road,  or  of  any  corporation,  created  by  or  under  any  law  of 
this  State,  w4th  the  appurtenances,  and  with  all  the  rights, 
powers,  immunities,  privileges  and  franchises  of  the  corpora- 
tion, as  whose  the  same  may  have  been  so  sold,  and  which 
ma}'  have  been  granted  to  or  conferred  thereupon,  by  any 
act  or  acts  of  Assembly  whatsoever,  in  force  at  the  time  of 
such  sale  and  conveyance,  and  subject  to  all  the  restrictions 
imposed  upon  such  corporation  by  any  such  act  or  acts,  ex- 
cept so  far  as  the  same  are  modified  hereby;  and  the  person 
for  or  on  whose  account  any  such  material,  rolling  stock, 
property  and  franchises  of  any  gas,  water,  iron,  steel,  lumber, 
oil,  or  mining  or  manufacturing,  transportation  or  telegraph, 
company,  or  any  railroad,  canal,  turnpike,  bridge  or  plank 


CORPORATIONS  75 

road,  or  of  any  corporation,  created  by  or  under  an\  law 
of  this  State,  may  have  been  purchased,  shall  meet,  within 
thirty  days  after  the  conveyance  thereof  shall  be  delivered, 
public  notice  of  the  time  and  place  of  such  meeting  having 
been  given,  at  least  once  a  week  for  two  weeks,  in  at  least 
one  newspaper  published  in  the  city  or  county  in  which  such 
sale  may  have  been  held,  and  organize  said  new  corporation 
by  electing  a  president  and  board  of  six  directors,  (to  con- 
tinue in  office  until  the  first  ^Monday  of  ]\Iay  succeeding  such 
meeting,  when  and  annually  thereafter  on  the  said  day  a  like 
election  for  a  president  and  six  directors  shall  be  held  to 
serve  one  year, )  and  shall  adopt  a  corporate  name  and  com- 
mon seal,  determine  the  amount  of  the  capital  stock  thereof, 
not  exceeding  the  amount  authorized  in  the  original  charter, 
and  shall  have  power  and  authority  to  make  and  issue  certifi- 
cates therefor  to  the  purchaser  or  purchasers  aforesaid,  to 
the  amount  of  their  respective  interests  therein,  in  shares  of 
fifty  dollars  each,  and  may  then  or  at  any  time  thereafter 
create  and  issue  preferred  stock  to  such  an  amount  and  on 
such  terms  as  they  may  deem  necessary,  and  from  time  to 
time  to  issue  bonds,  at  a  rate  of  interest  not  exceeding  six 
per  centum,  to  any  amount  not  exceeding  their  capital  stock, 
and  to  secure  the  same  by  one  or  more  mortgages  upon  the 
real  and  personal  property  and  corporate  rights  and  fran- 
chises, or  either,  or  any  part  or  parts  thereof :   {^Provided, 
That  no  coal,  iron,  steel,  lumber,  or  oil.  or  mining,  manufac- 
turing, transportation  or  telegraph  company,  shall  have  the 
benefit  of  this  act,  unless  it  shall  have  previously  filed,  with 
the  Secretary  of  State,  its  acceptance  of  all  the  provisions  of 
the  Constitution,  as  provided  by  law.]^*^ 

The  provisions  of  this  act  shall  not  inure  to  the  benefit 
of  any  corporation  unless  such  corporation    shall,    before 

"Act  of  April  8,  1861,  P.  L.  259.  The  words  printed  in  italics  were 
added  by  the  amendment  of  May  25,  1878,  P.  L.  145,  and  those  in 
brackets  by  the  amendment  of  May  31.  1887.  P.  L.  278. 

Section  2  of  the  Act  of  April  8.  t86i,  P.  L.  260.  as  re-enacted  by 
the  Act  of  :\Iay  25,  1878,  Section  2,  P.  L.  146,  provides  that  any  corpora- 
tion to  take  the  benefit  of  the  act  must  accept  Article  xvi  of  the  Con- 
stitution of  the  State. 


n  PENXSYLVAXIA  ASSOCIATIOX  ACTS 

claiming  or  using  the  benefits  of  this  act.  file  in  the  office  of 
the  secretary  of  the  commonwealth,  an  acceptance  of  the 
provisions  of  article  sixteen  of  the  constitution  of  this  com- 
monwealth, which  acceptance  shall  be  made  by  resolution 
adopted  at  a  regular  or  called  meeting  of  the  directors,  trus- 
tees or  other  proper  officers  of  such  corporation,  certified 
under  the  seal  of  the  corporation ;  and  a  copy  of  which  reso- 
lution, certified  under  the  seal  of  the  office  of  the  secretary 
of  the  commonwealth,  shall  be  eyidence  for  all  purposes.^' 
In  all  cases  in  which  the  property  and  franchises  of  any 
corporation,  mentioned  in  the  act  [of  April  8th,  1861,  P.  L. 
259,  and  its  supplement  of  May  25th,  1878,  P.  L.  148], 
or  of  any  telegraph  company,  may  haye  been  or  shall  here- 
after be  purchased  at  any  sale,  by  virtue  of  any  process  or 
decree  of  any  court  of  this  Commonwealth  or  the  circuit 
court  of  the  United  States,  or  under  or  by  virtue  of  a  power 
of  sale  contained  in  any  mortgage,  or  deed  of  trust,  without 
any  process  or  decree  of  a  court  in  the  premises,  the  person 
or  persons,  for  or  on  whose  account  the  same  may  have  been 
or  shall  hereafter  be  purchased,  shall  have  power  and  au- 
thority to  determine  the  amount  of  the  capital  stock  and 
bonds  to  be  issued  therefor,  and  to  issue  therefor  certifi- 
cates for  the  said  capital  stock,  and  also  bonds,  and  secure 
the  same  by  mortgage  or  mortgages  on  the  real  and  personal 
property,  corporate  rights  and  franchises  purchased.  Such 
stock  or  bonds,  or  both,  shall  be  issued  to  the  purchaser  or 
purchasers  for  their  respective  interests,  in  such  amounts  and 
proportions  as  may  be  determined  by  themselves,  and  shall 
be  deemed  and  taken  to  have  been  issued  for  and  in  con- 
sideration of  the  property  and  franchises  so  purchased  and 
received :  Provided,  That  no  railroad,  canal  or  other  trans- 
portation company,  or  telegrapli  company,  shall  have  the 
benefit  of  this  act,  unless  it  shall  Jiave  previously  filed,  with 
the  Secretary  of  State,  its  acceptance  of  all  the  provisions 


■'Act  of  May  25,  187S,  Section  3,  P.  L.  145. 


CORPORATIONS  V 

of  the  Coiisfitittion  of  this  State,  in  manner  and  form  as 
provided  by  laiv^^ 

In  all  cases  in  which  the  property  and  franchises  of  any 
corporation  mentioned  in  the  act  and  its  supplements,  and 
to  which  this  is  a  further  supplement,  or  of  any  telegraph 
company,  have  been  sold,  by  virtue  of  any  [order]  or  de- 
cree of  any  court  of  this  commonwealth  or  the  circuit  court 
of  the  United  States,  and  the  person  or  persons  for  or  on 
whose  account  the  same  have  been  purchased,  have  organized 
a  corporation  under  the  provisions  of  said  act,  and  have 
issued  stock  and  bonds  to  the  purchaser  or  purchasers  for 
their  respective  interests,  secured  by  mortgage,  in  such 
amount  and  proportions  as  may  have  been  determined  and 
agreed  upon  by  them,  such  issues  are  hereby  ratified,  ap- 
proved and  confirmed.^^ 


"  Act  of  May  25,  1878,  Section  i,  P.  L.  148.  The  words  printed  in 
italics  were  added  by  the  amendment  of  May  31,  1887,  P.  L.  276. 

"Act  of  May  25,  1878.  Section  2.  P.  L.  148,  Section  3,  provides 
that  any  corporation  to  take  the  benefit  of  the  act  must  accept  Article 
xvi  of  the  Constitution  of  the  State. 


78  PENNSYLVANIA  ASSOCIATION  ACTS 

LEGISLATION   SPECIALLY  PERTAINING  TO 
IMPORTANT  KINDS  OF  CORPORATIONS. 

RAILROADS. 

Act  of  February  19th,  1849,  P.  L.  79,  and  supple- 
ments. 

Act  of  April  4th,  1868,  P.  L.  62,  and  supplements. 

Pepper  &  Lewis's  Digest  of  Laws,  edition  of  1909, 
title,  Railroads  and  Canals. 

STREET    RAILWAYS. 

Act  of  March  22nd,  1887,  P.  L.  8.  Pepper  &  Lewis's 
Digest  of  Laws,  edition  of  1909,  title,  Corporations,  pars. 
415,  419,  422  to  428. 

Act  of  May  14th,  1889,  P.  L.  211.  Pepper  &  Lewis's 
Digest  of  Laws,  edition  of  1909,  title.  Corporations,  pars. 
509,  et  seq. 

Act  of  June  7th,  1901,  P.  L.  514.  Pepper  &  Lewis's 
Digest  of  Laws,  edition  of  1909,  title,  Corporations,  pars. 
528,  et  seq. 

GAS   AND   WATER    COMPANIES. 

Pepper  &  Lewis's  Digest  of  Laws,  title.  Corporations, 
edition  of  1909,  pars.  242-291. 

BANKS. 

Act  of  April  1 6th,  1850,  P.  L.  477.  Pepper  &  Lewis's 
Digest  of  Laws,  edition  of  1909,  title,  Banks  and  Banking, 
pars.  44,  et  seq. 

BANKING  CORPORATIONS. 

Act  of  May  13th,  1876,  P.  L.  loi.  Pepper  &  Lewis's 
Digest  of  Laws,  edition  of  1909,  title,  Banking  Companies, 
pars.  I,  et  seq. 


CORPORATIONS  79 

BANKING    DEPARTMENT. 

Act  of  February  nth,  1895,  P.  L.  4.  Pepper  &  Lewis's 
Digest  of  Laws,  edition  of  1909,  title.  Banks  and  Banking, 
pars.   I,  et  seq. 

ELECTRIC  LIGHT,    HEAT  AND  POWER   COMPANIES 

Pepper  &  Lewis's  Digest  of  Laws,  edition  of  1909,  title, 
Corporations,  pars.  221-226. 

INSURANCE    COMPANIES. 

Act  of  May  ist,  1876,  P.  L.  53.  Pepper  &  Lewis's 
Digest  of  Laws,  edition  of  1909,  title.  Insurance,  pars.  32, 
et  seq. 

MANUFACTURING    CORPORATIONS. 

Pepper  &  Lewis's  Digest  of  Laws,  edition  of  1909,  title. 
Corporations,  pars.  309-329. 


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